TeaM Energy Corporation

February 13, 2008 BIR RULING [DA-084-08] TeaM Energy Corporation TeaM Sual Corporation CTC Building Roxas Boulevard Pasay City Attention: Kazunobu Takijima Vice President, Controller Gentlemen : This refers to your letter dated November 26, 2007 stating that on June 22, 2007, the consortium of Marubeni Corporation and the Tokyo Electric Power Company, Incorporated completed its purchase of the shares of Mirant Asia-Pacific Limited relating to the Philippine energy business unit of Mirant Asia-Pacific Ventures through its Philippine subsidiary, Crimson Power Holdings; that the consideration for the acquisition (subsequently renamed as TeaM Energy Corporation and subsidiaries) was paid in US dollars; that the consortium obtained a US Dollar-denominated loan from Japanese institutions to finance the acquisition; that as of June 22, 2007, the foreign exchange rate of Peso versus US Dollar is P46.104:$1; that the Company's revenue stream from National Power Corporation under ECA for Pagbilao and Sual (capacity fees and energy fees) is denominated in US Dollar; that Pagbilao and Sual power generation plants are operated by TeaM Energy Corporation and TeaM Sual Corporation, respectively; that having a Dollar-denominated revenue stream acts as a natural forex hedge for the dollar-denominated loans; that from the closing date, the Peso appreciated in value and is continuing to do so and as of December 3, 2007, the foreign exchange rate is P42.75; that based on the current projections, the Peso is expected to level off at P42:$1 in the last quarter of 2007; that the Company's financial currency based on the accounting standards is the US Dollar, this means that forex losses/gains are only recognized for non-US dollar denominated in the dollar books of the Company; that however, for purposes of computing its income tax liability, the Company computes its tax liability using the Philippine Peso tax books or the historical rate method; that this is in accordance with the BIR Revenue Regulations No. 6-2006; that accordingly, the unrealized forex losses/gains recognized in the Peso tax books for the dollar-denominated loans; that as a result of the different accounting and tax treatment of transactions and functional currencies for financial and tax reporting, deferred tax asset (gain)/liability (loss) is recognized, that assuming a forex rate of P42:$1, the Company would have to recognize unrealized foreign exchange gains on its long-term debt, this means that assuming the Company will settle the long-term debt now, it will have a lower cash outlay than its value due to the appreciation of Philippine Peso; that the gain is a taxable foreign exchange gain at the settlement date, hence, the deferred tax liability and a corresponding accounting loss should be recognized; that consequently, the Company's earnings are penalized by these accounting unrealized losses resulting from the continuing appreciation of Peso based on the historical rate method; and that the Company computes its tax liability based on its financial currency, US Dollar, no forex losses or gains (realized or unrealized) will be recognized on the Dollar-Denominated debt. Based on the foregoing representations, you now request for clarification on the interpretation of Revenue Regulations No. 6-2006 particularly on whether it required the use of historical rate method (Peso Books) or current rate method (US$ Books) for purposes of computing an entity's tax liability and subsequently whether or not the Company, (specifically TeaM Energy Corporation and TeaM Sual Corporation), is allowed to use the current rate method applicable from June 23, 2007 onward since effectively, CrimsonPower acquired full ownership of MAPL only on June 23, 2007. In reply, please be informed that after a careful study of the said regulations, it seems that said regulations prescribe a historical rate method or actual conversion/prevailing rate on transaction date only for purposes of computing the income tax liability of a taxpayer qualified to use a functional currency. Thus, at the end of the year, a taxpayer will be required to make a reconciliation of the translated amounts with the figures in the peso subsidiary ledgers which the taxpayer has to maintain for purposes of its other tax liabilities. Said reconciling item shall be reflected in the annual income tax return. However, said regulations do not clearly describe how the reconciling item will be reflected in the annual income tax return. Accordingly, it will be complicated to combine the two concepts and the process of implementing the requirements will be tedious. To illustrate, assuming that a taxpayer had sales of US$1,000 and no allowable deductions, on transaction date, the exchange rate is US$1:P54.00 but the monthly average PDS rate applicable at that time was US$1:P53.00. What sales shall the taxpayer declare in its annual income tax return? On the other hand, for financial reporting purposes, said regulations provide that the use of functional currency other than the Philippine peso for financial recording and reporting purposes does not mean, however, the use of such functional currency for tax return purposes. Thus, when monetary items arise from a foreign currency transaction and there is a change in the exchange rate between the transaction date and the date of settlement, an exchange difference results. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognized in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognized in each period up to the date of settlement is determined by the change in exchange rates during each period. Accordingly, considering that in the current rate method (US$ Books) the tax liability is expected to closely approximate the tax liability under historical rate and any realized forex gains or losses from the dollar-based revenues will also offset the realized forex gains or losses from the loan repayments, your company, (TeaM Energy Corporation and TeaM Sual Corporation), is hereby allowed to use the current rate method applicable from June 23, 2007 since effectively, CrimsonPower acquired full ownership of MAPL only on June 23, 2007. Under the said method, the conversion rate to be used in the determination of the company's income tax liability shall be the conversion rate issued by Philippine Dealing System or PDS at balance sheet date, that is, as of end of taxable year December 31, 2007. However, prior to June 23, 2007, the Company (TeaM Energy Corporation and TeaM Sual Corporation) must still adhere to the historical rate method. By allowing the use of the current rate method in the preparation of the income tax return, there will be a settled resolution on how to properly reflect the reconciling items arising from the company's dollar-denominated transactions. Pending the issuance of the relevant regulation to supplement and clarify the provisions of said regulations, TeaM Energy Corporation and TeaM Sual Corporation, the operators of Pagbilao and Sual power generation plants, can rely on this particular ruling. (BIR Ruling Nos. DA-144-1985 dated August 26, 1985; 004-2003 dated June 3, 2003 and 622-2004 dated December 8, 2004) This amendatory ruling is in response to the letter of the taxpayer dated January 4, 2008 and supersedes BIR Ruling DA-673-2007 dated December 20, 2007. Please be guided accordingly. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service