Tan Venturanza Valdez

May 15, 2008 BIR RULING [DA-290-08] 32 (B) (7) (a) (ii); ITAD Ruling No. 020-03; DA-267-96 Tan Venturanza Valdez 2704 East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Atty. Enrico G. Valdez Gentlemen : This refers to your letter requesting on behalf of your client, Asia United Bank Corporation (AUBC), for confirmation of opinion that the income of China United Trust and Investment Corporation (CUTIC) from the sale of Four Million Eight Hundred Thousand (4,800,000) common shares in AUB, a commercial bank duly organized and existing under Philippine laws is not subject to income tax pursuant to Sec. 32 (B) (7) (a) (ii) of the 1997 Tax Code, as amended. It appears that CUTIC is a corporation duly organized and existing under Taiwan, R.O.C. to operate as a trust company. In connection with your request, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has already issued Resolution No. 313, dated March 14, 2008, approving the request of AUB for authority to acquire Six Million (6,000,000) common shares from its Taiwanese stockholders (which includes the Four Million Eight Hundred Thousand (4,800,000) common shares of CUTIC), provided that AUB shall dispose of said common shares within a period of six months from date of acquisition pursuant to Section 10 of Republic Act (R.A.) No. 8791 (The General Banking Law of 2000). The President of AUB, Mr. Abraham T. Co., was informed of the said resolution through a letter from the Central Point of Contact Department I of the BSP dated March 18, 2008. Moreover, the Central Deposit Insurance Corporation (CDIC) issued a Certification, the factual antecedents thereof gave rise to your request, which in part states: cDTaSH "This is to certify that in connection with the sale by Central Deposit Insurance Corporation (CDIC) and Financial Restructuring Fund (FRF) of China United Trust and Investment Corporation's (CUTIC) 4,800,000 common shares in Asia United Bank (AUB), a commercial bank duly organized and existing under Philippine laws: 1. CDIC is a government-owned entity organized based on the promulgation of the Deposit Insurance Act. Its capital is jointly invested by the Taiwan, R.O.C. Ministry of Finance and the Central Bank of Taiwan, R.O.C. 2. FRF was established by the Taiwan, R.O.C. Government pursuant to the Statute for the Establishment and Management of the Executive Yuan's Financial Restructuring Fund, which was promulgated by Presidential Decree on 9 July 2001 and amended on 22 June 2005. 3. The financial and operating conditions of CUTIC deteriorated such that its capital was already impaired having a negative book value. Thus, on March 29, 2007, in order to maintain order in the financial industry and safeguard the interests of CUTIC's depositors, the Financial Supervisory Commission, Executive Yuan named CDIC as the statutory administrator of CUTIC since 3:30 p.m., 30 March 2007. During the statutory administration period, the powers of CUTIC's stockholders, directors and supervisors have ceased and CDIC has the authority to manage the business and dispose of the assets of CUTIC. CUTIC therefore is controlled by the Taiwan, R.O.C. Government through CDIC. 4. CDIC and FRF have assumed the part of the liabilities of CUTIC that exceeds its assets. 5. The proceeds from the sale of the 4,800,000 AUB common shares will accrue to and be for the benefit of FRF and CDIC. HaIESC It is your opinion that pursuant to Section 32 (B) (7) (a) (ii) of the 1997 Tax Code, as amended, the income of CUTIC from the sale of 4,800,000 common shares in AUB is not subject to income tax because CUTIC is a financing institution controlled by Taiwan. In reply, please be informed that Sec. 32 (B) (7) (a) (ii) of the 1997 Tax Code, as amended, provides as follows: "(B) Exclusions from Gross Income The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (7) Miscellaneous Items. (a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments." From the foregoing, it is clear that CUTIC is a financing institution controlled by a foreign government, through CDIC, which is a wholly-owned government entity. When the Financial Supervisory Commission, Executive Yuan named CDIC as the statutory administrator of CUTIC, the powers of CUTIC's stockholders, directors and supervisors have ceased and CDIC gained the authority to manage the business and dispose of the assets of CUTIC. As CDIC and FRF have assumed the part of the liabilities of CUTIC that exceeds its assets, as a consequence of such assumption, CDIC and FRF should be entitled to receive the proceeds from the sale of the 4,800,000 AUB common shares. It is to be noted that the term foreign government includes not only the national government but also its political subdivisions, such as provinces, cities, municipalities and other instrumentalities of the government. TIaCAc In BIR Ruling No. DA-211-03, the Commissioner of Internal Revenue (CIR) ruled that the since the shares of WLG were in the aggregate 66.6% owned by the State of North Rhine-Westphalia (which is a State of Germany), and the Regional Associations of the Rhineland and Westphalia-Lippe, interest income earned by WLG is not subject to income tax pursuant to Section 32 (B) (7) (a) of the same Tax Code. The same opinion was enunciated in BIR Ruling No. UN-417-95 and furthermore, in BIR Ruling No. DA-218-96, an exemption from income tax was also granted to the interest income earned by the syndicate of foreign lenders, which were proportionally owned by political subdivisions of the government of Germany, namely: the State of North Rhine-Westphalia and the Regional Associations of the Rhineland and Westphalia, the Free State of Bavaria and the State of Lower Saxony. Lastly, in BIR Ruling No. 164-95, pursuant to the same provision of law, the CIR also excluded from gross income the interest income derived by the LBA, 19.6% of which is owned by the Republic of Austria and 45% owned by AVZ, which in turn is fully controlled by the City of Vienna. Considering, therefore, that Taiwan is a political subdivision of the People's Republic of China, then it is but proper that any income earned by it or of any financing institution, wholly-owned or controlled by it should likewise be exempt from income tax. As such, CUTIC being a financing institution owned, controlled, or enjoying refinancing from Taiwan is not subject to Philippine income tax under Sec. 32 (B) (7) (a) (ii) of the 1997 Tax Code, as amended, on its income from the sale of its 4,800,000 AUB common shares. 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