Isla Lipana & Co.

May 2, 2008 BIR RULING [DA-274-08] DA112-04 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Malou P. Lim Partner Gentlemen : This refers to your letter dated February 29, 2008 stating that your client, Investments 2234 Philippines Fund I (SPV-AMC), Inc., is a corporation duly organized and existing under the laws of the Philippines; that it was incorporated on May 11, 2007 primarily to invest in, or acquire Non-Performing Assets (NPAs) of financial institutions including Non-Performing Loans subject to compliance with requirements under the laws of the Philippines; that the Investments Philippines Fund is 99% owned by Investments Overseas Fund, a non-resident foreign corporation organized and existing under the laws of the Netherlands; that both Investments Philippines Fund and Investment Overseas Fund are indirect, wholly-owned subsidiaries of Bank of America Corporation, a publicly-held company whose stock is traded in the New York Stock Exchange; that on July 24, 2007, a loan in the amount of US$17,650,000 was obtained by Investments Philippines Fund from Investments Overseas Fund; that it has an interest rate of 15% on the outstanding principal amount, payable annually on date of drawdown; and that the proceeds of loan shall be used solely for the purpose of acquiring NPAs and as additional working capital. Based on the foregoing representations, you now request for confirmation of your opinion that the interest expense relative to its loan from Investments 2234 Overseas Fund VIII B.V. (Investments Overseas Fund) qualifies as a deductible expense for income tax purposes. In reply thereto, please be informed that Section 34 (B) of the Tax Code of 1997 provides as follows: "Sec. 34. Deductions from Gross Income . Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship . . ., in computing taxable income subject to income tax . . ., there shall be allowed the following deductions from gross income: (A) . . . (B) Interest. (1) In General. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax. Provided, That effective January 1, 2009, the percentage shall be thirty-three percent (33%). (2) Exceptions. No deduction shall be allowed in respect of interest under the succeeding paragraphs: xxx xxx xxx (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36(B); xxx xxx xxx Corollarily, Section 3 of Revenue Regulations No. 13-2000 provides that for the interest expense to be deductible from gross income, the following requirements must be met: 1. There must be an indebtedness; 2. There should be an interest expense paid or incurred upon such indebtedness; 3. The indebtedness must be that of the taxpayer; 4. The indebtedness must be connected with the taxpayer's trade, business or exercise of profession; 5. The interest expense must have been paid or incurred during the taxable year; 6. The interest must have been stipulated in writing; 7. The interest must be legally due; 8. The interest payment arrangement must not be between related taxpayers as mandated in Section 34 (B) (2), in relation to Section 36 (B), both of the Tax Code; 9. The interest must not be incurred to finance petroleum operations; and 10. In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure. However, Section 36 (B) of the Tax Code of 1997 provides that "(B) Losses from Sales or Exchanges of Property . In computing net income, no deduction shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly (1) Between members of a family. . . . xxx xxx xxx (2) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual if either one of such corporation, with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; xxx xxx xxx In the instant case, the loan entered into between Investments Philippines Fund, as the borrower, and Investments Overseas Fund, as the lender, is evidenced by a written loan agreement and the terms of the loan provide a principal amount of up to US$17,650,000, with stipulated interest of 15%, payable annually on every date of drawdown. The proceeds shall be used in connection with the business of Investments Philippines Fund, particularly for investment in non-performing assets and additional working capital. Thus, a careful scrutiny of the above-cited provisions disclosed that the Investments Philippines Fund and Investments Overseas Fund, although affiliates, are not to be considered as related parties as contemplated in Section 36 (B) (3) of the Tax Code. The ultimate parent of both companies is a publicly held-listed company. Accordingly, no individual owns directly or indirectly more than 50% of the outstanding capital stock of both Investments Philippines Fund and Investments Overseas Fund. This is fortified in BIR Ruling No. DA112-A-04 dated March 11, 2004, where this Office ruled that ". . ., it is apparent that for the interest to be deductible, the ownership of both corporations (CTFBV and CPI) must be traced to the level of the individual shareholder. (Sec. 36(B), Tax Code of 1997) Considering that both CPI and CTFBV are 100% owned by CTGEI which in turn is wholly-owned by CTC, which are ultimately owned by a publicly-held or listed US corporation, hence, no individual owns directly or indirectly more than 50% of the outstanding capital stock of both CPI and CTFBV. Accordingly, the interest payments by CPI to CTFBV on the refinancing loan are deductible from its gross income for income tax purposes." cDCHaS WHEREFORE, in view of the foregoing , this Office hereby confirms your opinion that the interest expense payments made or to be made by Investments Philippines Fund to Investments Overseas Fund on the loan are deductible from gross income for income tax purposes. 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. EaIcAS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service