eTelecare Global Solutions, Inc.

March 25, 2008 BIR RULING [DA-195-08] DA-608-06; DA-166-04 eTelecare Global Solutions, Inc. Citibank Square 20th Floor Eastwood Cyberpark Bagumbayan, Quezon City Attention: Atty. Michael N. Montero Director Atty. Ma. Louella M. Aranas Partner, ACB Law Offices This refers to your letter dated February 18, 2008 requesting, on behalf of your company, eTelecare Global Solutions, Inc. (eTelecare), for confirmation of your opinion that the difference in the foreign currency translation of costs directly attributable to your registered activity should be covered by the tax incentives ( i.e., income tax holiday and/or 5% gross income tax, whichever is applicable) granted by the Philippine Economic Zone Authority (PEZA) to eTelecare. It is represented that eTelecare, a publicly-traded company on both the United States NASDAQ and the Philippine Stock Exchange, is a leading provider of business process outsourcing (BPO) services focusing on the complex, voice-based segment of customer care services delivered from both the United States (through its US subsidiaries) and the Philippines; that eTelecare has been registered with the PEZA for the past eight years and all of its projects are granted tax incentives; that currently it is enjoying the benefit of income tax holiday and, after its expiration, the 5% gross income tax incentive. With respect to eTelecare's foreign currency risk management, it is represented that almost 100% of eTelecare's clients and programs are US-based companies and that all of its clients pay eTelecare in US Dollars (USD), which is the functional currency of eTelecare; that while eTelecare invoices and collects from its customers entirely in USD, eTelecare incurs and pays a substantial portion of its expenses, consisting mostly of employee payroll, rental, and utility payments related to its business operations, in Philippine Peso; that the Philippine Peso is considered by eTelecare as foreign currency considering that its functional currency is USD. HDICSa The dichotomy of USD revenues and Philippine Peso expenses has exposed the company to foreign currency risks; that due to this foreign currency risk, and in accordance with Philippine Accounting Standard 39 on Financial Instruments: Recognition and Measurement and the US Financial Accounting Standard 133 on Accounting for Derivative Instruments and Hedging Activities, eTelecare established its Foreign Currency Risk Management Policy with the following objectives: a. To reduce volatility in the USD value of eTelecare's cash flow; and b. To reduce volatility in the financial information provided to shareholders (particularly, volatility in earnings) that is caused by changes in foreign currency rates. It is further represented that based on the company's internal policy, eTelecare executes hedges of forecasted exposure to ensure that the dual objectives listed above are achieved; that by definition, forecasted exposure means exposure to changes in exchange rates between the time eTelecare forecasts foreign currency denominated expenses, which relates primarily on payroll and rent expenses, and the time that the forecasted expenses are actually incurred and recorded in earnings; that changes in exchange rates impact forecasted exposure directly, on the same line as the underlying cost ( e.g. cost of services); that in order not to result into a massive disruption of the operations of eTelecare, the hedging program being implemented by eTelecare is necessary to ensure that the various salaries and rent expense denominated in Philippine Peso will be met; that eTelecare makes monthly forecasts of its expenses based on the following: (a) prior experience, (b) known changes in business practices, and (c) high probability of occurrence; that such forecasts are evaluated on an on-going basis to verify the probability of occurrence; that assessments on new developments that may have an impact on the forecasted expenses are regularly made; that in the settlement of its other liabilities, eTelecare books in advance the said liabilities using the prevailing exchange rate: and that eTelecare at the time it settles its other liabilities translates the same used on exchange rates at the date of transactions. DAETcC In reply, please be informed as follows: Section 24 of R.A. No. 7916 provides that no taxes, local and national, shall be imposed on business establishments operating within the ecozone. The same law further provides that PEZA-registered enterprises shall enjoy the fiscal incentives stipulated in the said law with respect to income arising from its registered activity. In the instant case, the difference in the foreign currency translation of costs directly attributable to the registered activity of eTelecare shall be considered in the computation of its gross income subject to the incentives provided under the PEZA Law. Given that the business of eTelecare covers voice-based customer service, sales and technical support, its ability to meet its primary obligations to its employees and lessors and service providers for communication, light and water, are its most basic liabilities, without which eTelecare will not be able to operate. Therefore, the aforementioned difference resulting from the said transactions should be regarded as subject to the preferential tax regime given by PEZA to eTelecare. The foregoing position is consistent with PEZA Memorandum Circular No. 2005-032 dated September 15, 2005 herein quoted as follows: "The tax treatment of foreign exchange (forex) gains shall depend on the activities from which these arise. Thus, if the forex gain is attributed to an activity with income tax incentive (Income Tax Holiday or 5% Gross Income Tax), said forex gain shall be covered by the same income tax incentive. On the other hand, if the forex gain is attributed to an activity without income tax incentive, said forex gain shall likewise be without income tax incentive, i.e., therefore, subject to normal corporate income tax." It is worthwhile to mention that eTelecare's situation is distinct from foreign exchange gain or loss resulting from foreign denominated loans which was consistently held as not forming part of the registered activity of the PEZA company, considering that there was no nexus between the transaction giving rise to the foreign exchange gain or loss and the PEZA entity's registered activity (BIR Ruling DA-166-04 dated April 5, 2004; BIR Ruling DA-209-06 dated April 5, 2006). In the case of eTelecare, the foreign currency translation arose from liabilities incurred by the company which are directly attributable to the registered activity of eTelecare, such as those relating to, among others, the payment of employee salaries, rentals, and utility payments. LLpr Accordingly, the gain in the foreign currency translation of costs arising from the settlement of its liabilities directly connected to the registered activity of eTelecare as well as the implementation of the foreign currency hedging program, which is intended to address the adverse effects of foreign currency fluctuations, as well that arising from the settlement of liabilities, shall be covered by the tax incentives ( i.e., income tax holiday and/or 5% gross income tax, whichever is applicable) granted by PEZA to the said company, provided that such difference is attributable to expenses directly connected to the registered activity of eTelecare; Provided, that while on income tax holiday, any loss arising from the same shall not be allowed as a deduction from the gross income which may be subject to the regular corporate income tax; Provided, further that the withholding tax pertaining to the payment of its direct cost shall be based on the actual cost paid by eTelecare. 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 as represented 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