Chato & Vinzons-Chato

January 31, 2007 BIR RULING [DA-050-07] Chato & Vinzons-Chato 8th Floor, STRATA 2000 F. Ortigas Jr., Road Ortigas Center Pasig City Attention: Atty. Wilfredo M. Chato Gentlemen : This refers to your letter dated July 17, 2006 stating that as an investor in Republic of the Philippines (ROP) foreign currency Global Bonds for and in behalf of your clients, you would like to request for confirmation and clarification with reference to the Philippine Taxation of such ROP foreign currency Global Bonds, particularly on the undertaking by ROP contained in the Prospectus on the item of Additional Amounts vis--vis the item on Taxation as follows: "Additional Amounts The Philippines will make all payments on the debt securities without withholding or deducting any present or future taxes imposed by the Philippines or any of its political subdivisions, unless required by law. If Philippine law requires the Philippines to deduct or withhold taxes, it will pay the holders of the debt securities such additional amounts as are necessary to ensure that they receive the same amount as they would have received without such withholding or deduction. The Philippines will not pay, however, any additional amounts if the holder of the debt instruments is liable for the Philippines tax because: the holder of the debt securities is connected with the Philippines other than by merely owning the debt security or receiving income or payments on the bond; or On the other hand, the item on Taxation in the prospectus provide the following: " Effect of Holding Global Bonds. Payments by the Republic of principal of and interest on the global bond to a non-Philippine holder will not subject such non-Philippine holder to taxation in the Philippines by reason solely of the holding of the global bonds or the receipt of principal and interest in respect thereof. Taxation of Interest on the Global Bonds. When the Republic makes payments of principal and interest to you on the global bonds, no amount will be withheld from such payments for, or on account of, any taxes of any kind imposed, levied, withheld or assessed by the Philippines of any political subdivision or taxing authority thereof or therein. Taxation of Capital Gains . Non-Philippine holders of the global bonds will not be subject to Philippine income or withholding tax in connection with the sale, exchange, or retirement of a global bond if such sale, exchange, or retirement is made outside the Philippines or an exemption is available under an applicable tax treaty in force between the Philippines and the country of domicile of the non-Philippine holder." Based on the foregoing provisions of the ROP Global Bonds prospectus, you would like to request for confirmation on the following: 1. ROP, by undertaking that "it will make all payments of principal and interest in respect of the global bonds free and clear of, and without withholding or deducting, any present or future taxes of any nature imposed by or within the Republic unless required by law", is a tax-free covenant undertaking by ROP relieving and releasing the bondholders from any Philippine taxes of any nature that may be imposed on the bondholders for payments of principal and interests. Thus, ROP will be liable for income taxes due on principal and interest earned by the bondholders. 2. This tax-free covenant undertaking applies equality and without discrimination to all bondholders, regardless of nationality and residence, not just to non-Philippine holders. 3. Under Section 32 (B) (7) (g) of the Tax Code of 1997, gains (whether capital or ordinary) realized from the sale or exchange or retirement of bonds with a maturity of more than five (5) years is exempt from income tax. Thus, any gain realized by all bondholders (not just non-Philippine holders) from the sale, exchange or retirement of the global bonds, which has a maturity of more than 5 years, is exempt from income tax. In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. The government's guaranty to pay the interest free of any tax entitles the holder or investor of the instrument to receive the agreed interest without any deduction for the tax required to be withheld by the government on deposit substitute. It does not mean, however, that the interest income in itself is exempt from tax. There is no law or regulation providing for the tax exemption of interest income derived from any government bond or instrument, be it issued in peso or in foreign currency. The tax required to be withheld and remitted to the government is still due and payable to the BIR but to be borne by the government. Thus, notwithstanding the presence of a tax exemption clause in the ROP Global Bonds, the interest payments are still subject to the applicable income and withholding taxes, but the tax is borne by the issuer (ROP) and not deducted from the agreed amount of interest payable to the holder of the bond. ( Taxation of Financial Institution in the Philippines by Baladad) 2. The same rules apply to all bondholders, regardless of nationality and residence, not limited to non-Philippine holders. 3. Section 32 (B) (7) (g) of the Tax Code of 1997, as amended, provides that gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years, shall be excluded from gross income. The conditions for the exemption shall be as follows: a) The exemption of trading and redemption gains applies to both corporate and individual depositors or holders of debt instruments; b) In trading and. redemption gains derived from long-term securities, the maturity period required for the trading and redemption gains to be exempt is more than five years (or five years and one day); c) As long as the instrument has a maturity of more than five years, regardless of the length of time an investor holds on to the instrument, the gain is exempt from income tax; d) The exemption from trading gains refers to all bonds, debentures or certificates of indebtedness, whether the issuer is a bank or a non-bank. Thus, any gain realized by all bondholders (not just non-Philippine holders) from the sale, exchange or retirement of the global bonds, which has a maturity of more than 5 years, is exempt from income tax. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service