BIR Ruling [DA-461-03]

December 5, 2003 BIR RULING [DA-461-03] 32 (B) (7) (a) (ii); 215-91 Puno and Puno 12th Floor East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Atty. Roderico V. Puno Gentlemen : This refers to your letter dated November 17, 1999 stating that your client, First Gas Power Corporation (FGPC), a 100% subsidiary of First Gas Holdings Corporation, has undertaken to build, own and operate a combined cycle power station with a design capacity of approximately 1,000 MW in Batangas (the Project) pursuant to a Power Purchase Agreement it executed with the Manila Electric Company; that to partially finance the design, procurement, construction, commissioning and operation of the Project, FGPC secured foreign-currency denominated loans from a syndicate of lenders which includes, among others, the EIB; that these loan transactions are governed by a Common Terms Agreement by and among FGPC, as borrower, Export-Import Bank Malaysia Berhad, Malaysia Export Credit Insurance Berhad, Kreditanstalt Fur Wiederaufbau, ABN AMRO Bank N.V. as Malaysia Eximbank/Mecib Facility Agent for The Malaysia Eximbank/Mecib Lenders named therein, ABN-AMRO Bank N.V. as Note Purchase Facility Agent for the Note Holders, Philippine Commercial International Bank-Trust Banking as FCDU Facility Agent for the FCDU Lenders named therein, ABN-AMRO Bank N.V. as Revolving Credit/Working Capital Facility Agent for the Revolving Credit/Working Capital Lenders named therein, The Chase Manhattan Bank as Security Trustee, The Chase Manhattan Bank as Co-Security Trustee and ABN-AMRO Bank N.V. as Inter-Creditor Agent dated September 3, 1997, the EIB Finance Contracts A and B and various facility agreements; that EIB Finance Contract A, for sixty million ecus and EIB Finance Contract B, for twelve million ecus both dated July 30, 1997, were executed pursuant to the terms of which FGPC is obligated to make interest payments on the loan facilities; that EIB was created under the treaty of Rome which took effect on January 1, 1958 and also established the European Community; that it is an autonomous public institution within the European Union (EU) and operates on a non-profit basis; that it functions as the long term lending institution of the EU and finances public and private sector projects that meet EU's policy objectives; that since its inception, the EIB has been called upon to finance projects outside the EU in pursuance of the Union's policy of cooperation towards other countries; that such financing is mainly carried out under cooperation agreements and conventions negotiated by countries or group of countries with the EU; that with respect to the Philippines, a Framework Agreement was entered into between the Republic of the Philippines and the EIB on September 15, 1994 in order to facilitate the granting of loans by the EIB to borrowers in the Philippines; that on July 7, 1997, a Framework Renewal Agreement was executed amending the Framework Agreement and extending its validity for an extended period; that under Article 8 of the aforesaid Framework Agreement, the Philippine government has agreed to take the necessary measures to ensure that interest and all other payments due to EIB in respect of loans granted by it pursuant to the Framework Agreement are made without deductions for and withholding of any tax, levies or other imposts of any nature that may be legally imposed in the Philippines; and that EIB extended the loan facilities to FGPC after being satisfied that the financing of the project falls within the scope of the bank's functions and conforms to the objectives of the Framework Agreement. Based on the foregoing representations, you now request for a ruling that the interest income derived by EIB, a regional financing institution established by foreign governments, from the loan facilities it granted to FGPC, is exempt from Philippine income tax and consequently from withholding tax. In reply, please be informed that Section 32(B)(7)(a) of the Tax Code of 1997 provides that 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) financial institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments shall not be included in gross income and shall be exempt from taxation. Accordingly, since as represented EIB is a regional financing institution created under the Treaty of Rome and an autonomous public institution within the European Union as contemplated under Section 32(B)(7)(a)(ii) of the Tax Code of 1997, any interest income derived by EIB from its loan facilities granted to FGPC is exempt from Philippine income tax and consequently from withholding tax. ( BIR Ruling No. 215-91 dated October 24, 1991 ) 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. SEIaHT Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group