Puno and Puno Law Offices

January 4, 2010 BIR RULING [DA-(C-001) 001-10] 179; BIR Ruling 230-95; 137-98; 201-07 Puno and Puno Law Offices 12th Floor, East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center City of Pasig, Philippines 1605 Attention: Attys. Ma. Elizabeth E. Peralta-Loriega Mercedita L. Ona Garth F. Castaeda Gentlemen : This refers to your letter request dated December 1, 2009 requesting on behalf of your client, GNPower Mariveles Coal Plant Ltd. Co., confirmation of the taxability of the Omnibus Agreement to be entered into by your client. The facts, as represented, are as follows: GNPower Mariveles Coal Plant Ltd. Co. (the "Borrower") is a partnership duly organized and existing under the laws of the Philippines with principal office address at Unit 1905-D, The Orient Square, Don Francisco Ortigas, Jr. Road, Ortigas Centre, Pasig City, Metro Manila, 1605, Republic of the Philippines. It is registered with the Securities and Exchange Commission to engage primarily in the business of (a) developing, financing, obtaining permits and licenses for, constructing, owning and operating a 2 x 300 MW clean pulverized coal-fired electric power generation facility, including any future expansion, and other assets including transmission and sub-transmission lines and jetties, in each case to be located in the Bataan Province (the "Project"), (b) generation, sale and trade of electric power, importing machines, equipment, motor vehicles, tools, appurtenant spare parts, coal for fuel, lubricants, cleaning substances and other necessary and related materials or chemicals and (c) obtaining, entering into and performing any and all contracts and engaging in any and all transactions consistent with the foregoing purpose. In order to finance the Project, the Borrower has secured the following credit facilities: HASDcC a US Dollar-denominated construction and term loan with a credit limit up to US$493 million from the China Development Bank Corporation ("the "Offshore Senior Lender") (the "Offshore Facility"); US Dollar-denominated construction and term loans with a credit limit up to US$227 million from Banco de Oro Unibank, Inc., Bank of the Philippine Islands, China Banking Corporation, Security Bank Corporation and Standard Chartered Bank (together, the "Onshore Senior Lenders") (the "Onshore Facility"); and hedging facilities for interest rate exposure with respect to the Onshore Facility Tranche B (together with the Offshore Facility and the Onshore Facility, the "Senior Facilities") (the Offshore Senior Lender and the Onshore Senior Lenders, together the "Senior Lenders"). The Onshore Facility will be in the form of two separate tranches in the amounts of US$56 million ("Onshore Facility Tranche A") and US$171 million ("Onshore Facility Tranche B"). The Senior Facilities will be fully funded by the Senior Lenders. The respective availments and specific commitments of each of the Senior Lenders under the Senior Facilities are as follows: Offshore Facility Offshore Senior Lender Commitment China Development Bank Corporation US$493,000,000 Onshore Facility Tranche A Onshore Lender Commitment Banco de Oro Unibank, Inc. US$14,000,000 Bank of the Philippine Islands US$9,000,000 China Banking Corporation US$10,000,000 Security Bank Corporation US$23,000,000 Onshore Facility Tranche B Onshore Lender Commitment Banco de Oro Unibank, Inc. US$103,000,000 Bank of the Philippine Islands US$18,000,000 China Banking Corporation US$27,000,000 Standard Chartered Bank US$23,000,000; The above credit facilities are covered by facility agreements. The facility agreements, together with the following agreements, are embodied under one master agreement referred to as the Omnibus Agreement, 1 to wit: EcDSHT (a) Part A: Common Terms Agreement (b) Part B: Offshore Facility Agreement (c) Part C: Onshore Facility Agreement (d) Part D: Mortgage (e) Part E: Pledge Agreement (f) Part F: Security and Deposit Agreement; The Omnibus Agreement, which sets forth the terms and conditions upon which the Senior Lenders have agreed to provide loans to the Borrower for the purpose of financing the Project, is proposed to be signed by all the parties before the year ends. In order to induce the Senior Lenders to enter into the respective Facility Agreements and extend the financing described above, the Borrower and Mariveles Coal Project GP Corp., Power Partners Ltd. Co., Arlington Mariveles Philippines GP Corporation, Arlington Mariveles Netherlands Holding B.V., Sithe Global Camaya Holdings, Inc. and Sithe Global Camaya B.V. (together, the "Pledgors") have agreed to provide certain collateral security for the payment of the Borrower's obligations, including constituting a first priority perfected security interest over all of the Project assets and rights and the Pledgor's interests in the Borrower. The detailed terms of the security package are set forth under the Security and Deposit Agreement ("SDA"), the Pledge Agreement ("PA") and the Mortgage. Under the SDA, the Borrower shall transfer, assign and pledge to the Collateral Agents for the benefit of the Secured Parties a first-priority (subject to Permitted Liens) perfected Lien on and a continuing security interest in and to all of the Borrower's present and future right, title and interest in and to: (i) each of the Project Accounts; (ii) the Project, all personal and real property; (iii) all accounts, accounts receivable, contract rights, chattel paper, documents, instruments and general intangibles; (iv) the Project Documents; (v) all Approvals; and (vi) various agreements (collectively, the "Collateral"). The commitments of the Senior Lenders under each Facility Agreement to make available to the Borrower one or more advances from time to time during the Availability Period in an aggregate principal amount not exceeding their respective funding facility commitments is subject to the fulfillment of required conditions precedent that the general conditions precedent for borrowing are basically stated under Article II of the Common Terms Agreement and at the same time under Article III of the Facility Agreements. Two of the conditions precedent for the Borrower to draw under the Senior Facilities are (i) the delivery by the Borrower to the relevant Facility Agents of a Notice of Borrowing (CTA, Section 2.03 (a)); and (ii) the issuance of the Borrower of a Note in favor of each of the Senior Lenders (CTA, Section 2.02 (b)). The Note to be issued shall cover the actual amount advanced by a particular Senior Lender, which will not be for the whole amount of the Senior Lender's credit commitment. The Borrower may issue one or more Notes to cover the amount actually drawn from time to time but not exceeding the maximum aggregate amount of the Senior Lender's credit commitment. ECDHIc Based on the foregoing, you now request for confirmation of your opinion that the Omnibus Agreement, being a credit facility, is not subject to DST on loan agreements under Section 179 of the Tax Code upon execution thereof since a credit facility is not yet a loan agreement under Philippine tax laws. However, once an actual drawdown is made, the DST shall be due based only on the amount actually drawn and not on the entire amount of the credit facility. In reply, please be informed that Section 179 of Republic Act (R.A.) No. 9243, amending Section 180 of the Tax Code of 1997, imposes DST on every original issue of debt instruments. Embraced under the definition of "debt instruments" are loan agreements, including those signed abroad wherein the object of the contract is located or used in the Philippines, to wit: 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 instrument 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. 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, including those signed abroad wherein the object of contract is located or used in the Philippines , instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation. (Emphasis supplied.) Section 3 (b) of Revenue Regulations ("RR") No. 9-94, in turn, defines a loan agreement as "a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall include credit facilities , which may be evidenced by credit memo, advice or drawings." (Emphasis supplied.) HICcSA While credit facilities are among the agreements included in the definition of a loan agreement under RR 9-94 above quoted, a credit facility per se is not considered a loan agreement for purposes of the DST until and unless the Borrower makes an actual drawdown therefrom. In this regard, our pronouncement in BIR Ruling No. DA-036-07 dated January 24, 2007 is apposite, viz. : A credit facility is merely a facility or a line for making a specific amount available for the use of the borrower. It is not tantamount to the delivery of the money to the borrower. Only when the borrower makes use of the available amount by drawing on this facility will there be delivery of the money that will give rise to a loan, but only up to the amount of the actual amount of money that was drawn from the credit facility. (Emphasis supplied.) The above-quoted elucidation makes it clear that for credit facilities to be considered as loan agreements subject to DST, they must be evidenced by a credit memo, advice or drawings. This is further explained in the second paragraph of Section 6 of RR No. 9-94 which provides: In cases where no formal loan agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidence by credit/debit memo, advice or drawings by any form of check or withdrawal slip, under Sec. 180 (now Section 179) of the Tax Code, as amended. (Emphasis supplied.) Based on the foregoing, credit facilities by themselves are not considered debt instruments that are subject to DST. There must be another document to prove that such credit facility has indeed been converted into a loan agreement, either by the execution of a formal loan agreement or a promissory note, or even by a credit/debit memo, advice or drawings to prove that the credit facility has been availed of by the borrower. Considering that the drawdown of the amount made available through the credit facility is the operative act which gives rise to liability to DST in loan agreements, DST under Section 179 of the Tax Code shall only be imposed once an actual drawdown is made by the Borrower. The concept of a drawdown was thoroughly discussed in BIR Ruling No. 137-98 dated September 24, 1998 and BIR Ruling DA 201-07 dated April 2, 2007 as follows: TESDcA ". . . the execution of the Master Agreement is a taxable event subject to documentary stamp tax. In the instant case, however, the Master Agreement is not the loan contract itself but an undertaking which envisaged that the lender shall make available for the borrower a certain some of money at a given date which drawdown shall be covered by a loan agreement. Thus, where the subject matter of an agreement is to deliver something or money in this, it being a real contract, the same is not deemed perfected until after the object of the contract is delivered as provided for in Article 1316 of the Civil Code in relation to Article 1934 of the same Code, which provides, that 'Article 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the subject of the contract.' The drawdown is the delivery of the amount covered by the loan agreement for which a Note is also issued. Considering that the face value of the Note issued is equal to amount of the loan stated in the agreement and actually disbursed, the documentary stamp tax on such loan may be levied either on the loan agreement covering the amount so drawn at a particular dates, i.e., the amount of US$15,267,175.57 at the initial drawdown and each Note that may thereafter be issued there being no difference. Accordingly, pursuant to Section 180 of the Tax Code of 1997, this Office hereby holds that since the herein taxpayer categorically states that each Note shall correspond to the amount drawn as scheduled and stated in the contract, then the corresponding documentary stamp tax at the rate prescribed therein, shall be based on the face value of the said Note actually issued which is equivalent to the amount of the loan actually disbursed as of drawdown date." Such being the case, the Omnibus Agreement being a credit facility, is not yet a loan agreement under Philippine tax laws. The execution of the Omnibus Agreement, therefore, will not in itself attract DST on the original issue of debt instruments imposed by Section 179 of the Tax Code. However, once an actual drawdown is made, the DST shall be due on the amount actually drawndown. This ruling is being 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.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group Footnotes 1. Capitalized terms shall have the meanings set forth under the Omnibus Agreement.