SGV & Co.

May 31, 2007 BIR RULING [DA-317-07] 179; 195; RR 9-94; 188-99; DA-091-03; DA 340-06 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Division Gentlemen : This refers to your letter dated May 23, 2007 stating that your client, CrimsonPower Holdings Company Inc. ("CrimsonPower") is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with SEC Company Registration Number CS20061972; that its principal stockholders are Tokyo Electric Power Company International B.V. (TEPCI) and Marubeni Corporation (MC); that TEPCI and MC are non-resident foreign corporations that won the bid for the acquisition of the power generation interests in the Philippines owned by the subsidiaries of Mirant Corporation; that CrimsonPower was established by TEPCI and MC to acquire Mirant Asia Pacific Limited (MAPL), the Mirant subsidiary which owned the power generation interests in the Philippines; that to finance the acquisition of MAPL, CrimsonPower is obtaining a loan from Japan Bank for International Cooperation (JBIC) and Japanese commercial banks, Mizuho Corporate Bank (Mizuho Bank) and Sumitomo Mitsui Banking Corporation (SMBC); that Mizuho Bank and SMBC are non-resident foreign corporations, organized and existing under the laws of Japan, with principal offices located in 3-3 Marunouchi 1-chome, Chiyoda-ku, Tokyo, Japan and 1-2 Yurakucho 1-chome Chiyoda-ku, Tokyo, Japan; that the loan shall be obtained by CrimsonPower twenty one (21) days before closing date; that the total amount of the loan is UD$2,700,000,000.00 (US$2.7 Billion), sixty percent (60%) of which or the amount of US$1,620,000,000.00 (US$1.620 Billion) is by way of direct loan from JBIC, while the other forty percent (40%) or the amount of US$1,080,000,000.00 (US$1.08 Billion) is by way of direct loan from Mizuho Bank and SMBC; that JBIC provided guarantee in favor of Japanese commercial lenders, Mizuho Bank and SMBC through 100% of the ordinary interest on the principal amount of the facility loan accrued at commercial interest rate which becomes due and demandable on the scheduled date under the Senior Loan Agreement; that CrimsonPower, its stockholders TEPCI and MC are required to mortgage and pledge, its assets including the power plant facilities and shares of stocks, respectively, of MAPL and its subsidiaries, to take effect within a reasonable period of time from the acquisition of said shares and assumption of management in MAPL Group of Companies; that as security for the loan, CrimsonPower, its stockholders, TEPCI and MC will execute the following security documents, as part of the Omnibus Agreement: (1) General Pledge Agreement; (2) General Security Assignment; and, (3) Shareholder Loan Security Assignment. HaIATC Furthermore, it is represented that TEPCI and MC, as Pledgors will execute General Pledge Agreement in favor of Lenders, JBIC and Japanese commercial banks, through their Offshore Security Trustee, Mizuho Bank; that under the General Pledge Agreement, TEPCI and MC will pledge its shares of stock in CrimsonPower; that it is likewise provided in the General Pledge Agreement that other obligors, as may be required by the Senior Loan Agreement, may subsequently become parties to the General Pledge Agreement by execution of Accession Agreement, in which case, the accession of additional obligors shall bind them to the terms and conditions of the General Pledge Agreement; that TEPCI and MC, as Security Providers and JBIC together with Japanese commercial bank lenders, through Mizuho Bank, will execute a Shareholder Loan Security Assignment whereby, TEPCI and MC will constitute security on the collateral, as defined in the said contract; that CrimsonPower, as Security Provider, and JBIC together with Japanese commercial bank lenders, through Mizuho Bank, will execute a General Security Assignment whereby CrimsonPower will grant to Mizuho Bank for the benefit of the Lenders a continuing first-priority security interest in all CrimsonPower's rights and interests under the collateral, consisting among others, of personal property, such as: contracts to which CrimsonPower is a party, books and records relating to the contracts and proceeds relating to the contracts; that in connection with the above-planned transactions, CrimsonPower, JBIC, Mizuho Bank and SMBC will execute an Omnibus Agreement which, among other documents, will include the following documents: (1) Prefatory Statement; (2) Senior Loan Agreement; (3) Sual Mortgage Agreement (Registered Land) (as an exhibit); (4) Sual Mortgage Agreement (Unregistered Land) (as an exhibit); (5) Pagbilao Mortgage Agreement (as an exhibit); (6) Assignment Agreement (as an exhibit); (7) General Security Assignment; (8) General Share Pledge Agreement; (9) Reinsurance Assignment Agreement (as an exhibit); (10) Retrocession Assignment Agreement (as an exhibit); (11) Shareholder Loan Security Assignment; (12) Mezzanine Loan Security Assignment; and, (13) Singapore Accounts Charge. Moreover, within a reasonable period of time from the acquisition and take over of management of MAPL Group of Companies, CrimsonPower or new mortgagor/pledgor will mortgage and pledge additional assets, including the power plant and shares of stock of MAPL and its subsidiaries; that CrimsonPower will also obtain (or cause a member of the MAPL Group of Companies to obtain) certain insurance and reinsurance arrangements, which will also be assigned, by way of security, to secure the loan; that the parties shall enter into an Amended and Restated Omnibus Agreement which will include the execution by certain members of the MAPL Group of Companies (which would then be under the control of CrimsonPower of (i) Sual Mortgage Agreement (Registered Land), (ii) the Sual Mortgage Agreement (Unregistered Land); (iii) the Pagbilao Mortgage Agreement; and, (iv) the Assignment Agreement. The Amended and Restated Omnibus will also include the execution of the Reinsurance Assignment Agreement and the Retrocession Assignment Agreement, in respect of the newly-obtained insurance policies; that these agreements provide additional security by new mortgagor/assignors contained in Pledge and Mortgage Agreements; that despite the constitution of additional security, there will be no change, whatsoever, in the original amount of the loan secured which will remain at US$2.7 Billion, nor will there be any extension of the term of the loan. Based on the foregoing representations, you now request for a ruling that: (A) The Omnibus Agreement, which embodies, among others, Senior Loan Agreement and Security Documents, such as the General Pledge Agreement, General Security Assignment and Shareholder Loan Security Assignment executed to secure such loan, is to be treated as covering only one (1) taxable transaction, subject to the higher documentary stamp tax (DST) rate under Section 179 of the National Internal Revenue Code of 1997, (Tax Code), as amended ; and, (B) The amendment and restatement of the Omnibus Agreement for purposes of providing additional or substitute security to the creditor by a new mortgagor/pledgor/assignor, will not be subject to DST as long as there is no change in the original amount of the loan secured; In reply thereto, please be informed as follows: On the issue of DST on the Omnibus Agreement (A) The DST rate of a loan agreement is provided under Section 179 of the National Internal Revenue Code of 1997 (Tax Code), as amended by Republic Act No. 9243 , which provides: "SEC. 179. Stamp Tax on All Debt Instruments . On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments : Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan . cEITCA For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements . . ." With regard to another type of security, in particular Mortgage and Pledge Agreements, Section 195 of the 1997 Tax Code, as amended , provides as follows: "SEC. 195. Stamp Tax on Mortgages, Pledges and Deeds of Trust. On every mortgage or pledge of lands, estate, or property, real or personal, heritable or movable, whatsoever, where the same shall be made as a security for the payment of any definite and certain sum of money lent at the time or previously due and owing or forborne to be paid, being payable , and on any conveyance of land, estate, or property whatsoever, in trust or to be sold, or otherwise converted into money which shall be and intended only as security, either by express stipulation or otherwise, there shall be collected a documentary stamp tax at the following rates : "(a) When the amount secured does not exceed Five thousand pesos (P5,000), Twenty pesos (P20.00). "(b) On each Five thousand pesos (P5,000), or fractional part thereof in excess of Five thousand pesos (P5,000), an additional tax of Ten pesos (P10.00) . (Emphasis supplied) Creating the One-Taxable-Transaction Rule, Section 8 of Revenue Regulations No. 9-94 provides that: "SEC. 8. Loan Agreements/Promissory Notes Secured by a Pledged/Mortgage . Where only one instrument was prepared, made, signed and executed to cover a loan agreement/promissory note, pledge/mortgage , the documentary stamp tax prescribed in Section 195 of the Tax Code, as amended, shall be paid and computed on the full amount of the loan or credit granted. In this regard, the instrument shall be treated as covering only one taxable transaction, subject to the higher documentary stamp tax . (Emphasis supplied) It is clear from the above-cited provisions that notwithstanding the execution of several instruments to cover loan, mortgages, pledges, and assignments, only one documentary stamp tax is payable. (BIR Ruling No. DA-091-03 dated April 22, 1998 * ) Hence, the Omnibus Agreement which will include the Senior Loan Agreement and Security Documents, such as the General Pledge Agreement, General Security Assignment and Shareholder Loan Security Assignment executed to secure such loan, is to be treated as covering only one (1) taxable transaction and, hence, will be subject to only one (1) DST, in particular the rates provided under Section 179 of the Tax Code, as amended , which is "One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments." (B) With respect to the issue of executing additional or substitute mortgage and pledge by new mortgagor/pledgor, for as long as there is no change in the original amount of the loan secured, the additional or substitute mortgage/pledge executed by a new mortgagor/pledgor is not subject to DST. In BIR Ruling No. DA-340-06 dated May 26, 2006 , this Office ruled that: "In several occasions, this office had the opportunity to rule on the issue of novation in relation to the application of DST. Thus, in instances such as a change of pledge or pledgors (BIR Ruling No. 188-99, dated November 29, 1999), or the mere additional collateral as supplementary security to a contract of loan (BIR Ruling Nos. 218-90, dated November 22, 1990 & UN-230-95, dated June 26, 1995), the original loan agreement is neither extinguished or replaced as the same are mere additional obligations not incompatible with the original loan, hence, no DST is payable in those instances." Again, in BIR Ruling No. 188-99 dated November 29, 1999 , we ruled as follows: "In reply, please be informed that your opinion is hereby confirmed. The execution of the proposed agreements like Substituting the Pledgors under the New Pledge Agreement and the shares of stock under the Agreement on Substitution of Pledged Shares without any change in the terms and conditions of the original pledge agreement as well as the original amount of the loan secured are not subject to the documentary stamp tax imposed under Section 195 of the Tax Code of 1997." cCTIaS Accordingly, any addendum to the Omnibus Agreement for purposes of providing additional or substitute security to the creditor by a new mortgagor/pledgor, will not be subject to DST as long as there is no change in the original amount of the loan secured. This ruling is 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.) JOSE MARIO C. BUAG Commissioner of Internal Revenue