SGV & Co.

January 24, 2007 BIR RULING [DA-036-07] 179; 180; 28; 42; RR 9-94 #137-98 SGV & Co . 6760 Ayala Avenue Makati City Attention: Atty. E.C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated January 10, 2007 requesting on behalf of your client, CrimsonPower Holdings Company Inc. ("CrimsonPower"), for confirmation of your opinion that the assignment to CrimsonPower by Tokyo Crimson Energy Holdings Corporation (Tokyo) of the US$2.8 Billion Credit Facility Agreement dated December 11, 2006 (hereinafter referred to as the Agreement) it entered with several non-resident foreign entities and the corresponding income payments arising therefrom will not have any Philippine tax consequence, specifically that: 1. The Agreement, in itself, being a credit facility, is not subject to DST on loan agreements since a credit facility is not yet a loan agreement under Philippine tax laws unless Crimson Power makes an actual drawdown therefrom. Once an actual drawdown is made, the DST is due on the amount of the actual drawdown and not on the entire amount of the credit facility; and 2. The Agents' Fees to be paid to Mizuho Corporate Bank, Ltd. and the Upfront Fee and Cancellation Fee as well as the Commitment Fee to be paid to Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation arising from the Agreement are considered income derived from sources outside the Philippines and therefore not subject to final withholding tax in the Philippines, pursuant to Section 28 (B) (1) in relation to Section 42 (C) of the 1997 Tax Code, as amended . It is represented that CrimsonPower is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with SEC Company Registration Number CS200619721. Its principal stockholders are Tokyo Electric Power Company International B.V. (TEPCO) and Marubeni Corporation (MC). TEPCO and MC are non-resident foreign corporations that won the bid for the acquisition of the power generation interests in the Philippines owned by the subsidiaries of Mirant Corporation. CrimsonPower was established by TEPCO and MC to acquire Mirant Asia Pacific Limited, the Mirant subsidiary which owns the power generation interests in the Philippines. It is further represented that Tokyo Crimson Energy Holdings Corporation is a corporation incorporated in Cayman Islands by MC and TEPCO. On December 11, 2006, it entered into a US$ 2.8 Billion Credit Facility Agreement (the Agreement) with Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation as the Lead Arrangers and Original Lenders, Mizuho Corporate Bank, Ltd. as the Facility Agent and as Security Agent. Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation are all non-resident foreign entities with no business presence in the Philippines. The Agreement embodies the commitment of the Original Lenders to make available to Tokyo a term loan facility in the aggregate amount of US $2.8 Billion, which loan may only be used in or towards (a) payment of the purchase price for the Company (referring to Mirant Asia Pacific Limited) shares under the Stock Note and Purchase Agreement and (b) payment of the Permitted Cost and Expenses as defined under the Agreement (Sec. 3.1 of the Agreement). Section 27.1 (b) of the Agreement authorizes Tokyo to transfer to CrimsonPower all of its rights, obligations and liabilities under the Agreement. Based on the foregoing, you now request a confirmation of your opinion that in case Tokyo assigns the Agreement to CrimsonPower pursuant to Sec. 27.1(b) of the Agreement: 1. The Agreement, in itself, being a credit facility, is not subject to DST on loan agreements since a credit facility is not yet a loan agreement under Philippine tax laws unless Crimson Power makes an actual drawdown therefrom. Once an actual drawdown is made, the DST is due on the amount of the actual drawdown and not on the entire amount of the credit facility; and 2. The Agents' Fees to be paid to Mizuho Corporate Bank, Ltd. and the Upfront Fee and Cancellation Fee as well as the Commitment Fee to be paid to Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation arising from the Agreement are considered income derived from sources outside the Philippines and therefore not subject to final withholding tax in the Philippines, pursuant to Section 28 (B) (1) in relation to Section 42 (C) of the 1997 Tax Code, as amended . SCcHIE In reply, please be informed as follows: I. On the Agreement Pursuant to Section 179 of the Tax Code of 1997, as amended by RA 9243, DST is imposed on every original issue of debt instruments. The term "debt instruments" can refer to loan agreements, including those signed abroad wherein the object of the contract is located or used in the Philippines, to wit: "SEC. 179. Stamp Tax on All Debt Instruments . On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: Provided, That for such debt instrument with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of contract is located or used in the Philippines , instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." (Emphasis supplied) Section 3 (b) of Revenue Regulations No. 9-94 defines a loan agreement as follows: "It is a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings ." (Emphasis supplied) It is clear that for credit facilities to be considered as loan agreements subject to DST, they must be evidenced by either a credit memo, advice or drawings. This is further expounded in the 2nd paragraph of Sec. 6 of the same Regulations as follows: " In cases where no formal loan agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidence by credit/debit memo, advice or drawings by any form of check or withdrawal slip , under Sec. 180 (now Section 179) of the Tax Code, as amended." (Emphasis supplied) Based on the foregoing provisions, credit facilities by themselves are not considered debt instruments that are subject to DST. There must be another document to prove that such credit facility has indeed been converted into a loan agreement, either by the execution of a formal loan agreement or a promissory note, or even by a credit/debit memo, advice or drawings to prove that the credit facility has been availed of by the borrower. A credit facility is merely a facility or a line for making a specific amount available for the use of the borrower. It is not tantamount to the delivery of the money to the borrower. Only when the borrower makes use of the available amount by drawing on this facility will there be delivery of the money that will give rise to a loan, but only up to the amount of the actual amount of money that was drawn from the credit facility. This legal principle was succinctly explained in BIR Ruling No. 137-98 dated September 24, 1998 which involves a Master Agreement structured as a standard Euro or Asian Dollar loan agreement, but is essentially a commitment by the Lenders to make Loans available to CMMTC in the future upon fulfillment of the required conditions. We quote the pertinent portion of the ruling as follows: "Categorically, the execution of the Master Agreement is a taxable event subject to documentary stamp tax. In the instant case, however, the Master Agreement is not the loan contract itself but an undertaking which envisaged that the lender shall make available for the borrower a certain sum of money at a given date which drawdown shall be covered by a loan agreement . Thus, where the subject matter of an agreement is to deliver something or money in this case, it being a real contract, the same is not deemed perfected until after the object of the contract is delivered as provided for in Article 1316 of the Civil Code in relation to Article 1934 of the same Code, which provides that 'ARTICLE 1934. An accepted promise to deliver something by way of commodatum or simple loan itself binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the subject of the contract.' The drawdown is the delivery of the amount covered by the loan agreement for which a Note is also issued . Considering that the face value of the Note issued is equal to amount of the loan stated in the agreement and actually disbursed, the documentary stamp tax on such loan may be levied either on the loan agreement covering the amount so drawn at a particular dates , i.e., the amount of US$50,000,000.00 or on the Note actually issued as of drawdown date , which is US$15,267,175.57 at the initial drawdown and each Note that may thereafter be issued there being no difference . Accordingly, pursuant to Section 180 of the Tax Code of 1997, this Office hereby holds that since the herein taxpayer categorically states that each Note shall correspond to the amount drawn as scheduled and stated in the contract, then the corresponding documentary stamp tax at the rate prescribed therein, shall be based on the face value of the said Note actually issued which is equivalent to the amount of the loan actually disbursed as of drawdown date ." (Emphasis supplied) In the present case, the Agreement is essentially an agreement among the Lenders to make available to the Borrower a term loan facility in the aggregate amount equal to the Total Commitments subject to certain conditions (Sec. 2.1 of the Agreement). The Borrower may borrow the Loan by giving to the Facility Agent a duly completed Request (Sec. 5.1). The Request for the Loan will not be regarded as having been duly completed unless: (a) the Utilisation date is a Business Day falling within the Availability Period; (b) the proposed Term complies with the Agreement; ISDCHA (c) it attaches a Funds Flow Statement. (Sec. 5.2) If the Conditions set out in the Agreement have been met, each Lender must make its share in the requested Loan available to the Facility Agent for the Borrower through its Facility Office on the Utilisation Date. (Sec. 5.3[d]) The Utilisation Date, as defined in the Agreement, is the date on which the Facility is utilized by the drawing of the Loan (p. 19 of the Agreement) It is at this time when the Borrower draws on the available Loan. Thus, only at this point in time will there be a delivery of the money that will give rise to a loan in the amount that was actually drawn (evidenced by the drawdown if no loan agreement or promissory note is executed) which is subject to DST under Sec. 179 of the Tax Code of 1997, as amended. Such being the case, this Office hereby confirms that the assignment by Tokyo to CrimsonPower of the US$2.8 Billion Credit Facility Agreement dated December 11, 2006 will not result to an imposition of DST on the Agreement. The Agreement, in itself, being a credit facility, is not subject to DST on loan agreements since a credit facility is not yet a loan agreement under Philippine tax laws unless CrimsonPower makes an actual drawdown therefrom. Once an actual drawdown is made, the DST is due on the amount of the actual drawdown and not on the entire amount of the credit facility, pursuant to Sec. 179 of the Tax Code of 1997, as amended. II. On the Agents' Fees, Upfront Fee and Cancellation Fee as well as the Commitment Fee As a general rule, foreign corporations not engaged in trade or business in the Philippines such as Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation are taxed only on Philippine-sourced income ( Sec. 28(B)(1), 1997 Tax Code, as amended ). In the case of services, the situs of taxation is the place where the service is rendered, regardless where the payment is made. Thus, fees for services rendered outside the Philippines are considered foreign-sourced income and will not be subject to Philippine income tax ( Sec. 42(C), 1997 Tax Code, as amended ). The Agents' Fees to be paid to Mizuho Corporate Bank, Ltd. and the Upfront Fee and Cancellation Fee as well as the Commitment Fee to be paid to Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation are for services that were performed and will be performed by these non-resident foreign entities outside of the Philippines, pursuant to the Agreement. In BIR Ruling No. 097-87 dated April 6, 1987 , the BIR held that guarantee fees, commitment fees and agent fees paid by NPI (a domestic corporation), upon satisfactory proof that said fees were paid not only to the lenders, but also to other parties for services performed outside the Philippines, do not form part of interest income but rather constitute income sourced from outside the Philippines, thus exempt from Philippine income tax. Moreover, in ITAD Ruling No. 113-03 dated August 1, 2003 , the BIR held that guarantee fees received by JEXIM (now JBIC) for services performed outside of the Philippines, all paid by San Roque Power Corporation (SRPC), are considered income derived from sources outside the Philippines and therefore not subject to final withholding tax in the Philippines. Accordingly, this Office hereby confirms that since the Agents' Fees to be paid to Mizuho Corporate Bank, Ltd. and the Upfront Fee and Cancellation Fee as well as the Commitment Fee to be paid to Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation are for services performed outside of the Philippines, they are considered income derived from sources outside the Philippines and therefore, are not subject to final withholding tax in the Philippines, pursuant to Section 28 (B) (1) in relation to Section 42 (C) of the 1997 Tax Code, as amended . This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service