Quiason Makalintal Barot Torres & Ibarra

July 21, 2008 BIR RULING [DA-(C-013) 065-08] 28 (B); 42 (C); 105; 108; DA-036-07; 164-95; 057-97 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue corner Pedro Poveda Street 1605 Ortigas Center, Pasig City Attention: Atty. Ruelito Q. Soriano and Atty. Benedict R. Tugonon Gentlemen : This refers to your letter dated July 11, 2008 requesting on behalf of your client UNIFIED HOLDINGS CORPORATION ("Unified") for a ruling confirming the tax consequences of the payments under the Facility Agreement in relation to the US$35 Million bridge loan facility dated June 30, 2008 ("Bridge Loan"), executed by Unified, as borrower, and ING Bank N.V., Singapore Branch ("ING"), as lender. Specifically, Unified seeks confirmation of its position, as follows: a) the upfront fees payable under the Bridge Loan is not subject to income tax and value-added tax and consequently not subject to any withholding tax in the Philippines being payments for services rendered outside the Philippines; and b) the interest charges paid to ING N.V. Singapore Branch is subject to the 10% preferential tax treaty rate under the RP-Netherlands Tax Treaty. ICHDca Background The borrower, Unified, is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with office address at 3rd Floor Benpres Building, Meralco Ave. cor. Exchange Road, Ortigas Center, Pasig City, Philippines. The lender, ING Bank N.V. Singapore Branch, is a bank and a public limited liability company organized under the laws of The Netherlands with head office address at the ING House, Amstelveenseweg 500, 1081 KL Amsterdam, Netherlands and is acting through its Singapore branch with office located at 9 Raffles Place, #19-02, Republic Plaza, Singapore 048619. ING Bank N.V. and its Singapore Branch are not engaged in trade or business in the Philippines. Last June 30, 2008, the parties entered into a Bridge Loan which provides for the payment by Unified to ING of the (a) up-front fee or facilitation fee ( "Up-front Fees" ), and (b) interest under Clause 9 of the Bridge Loan ( "Interest" ). We reply, as follows: A) Up-Front Fee The Up-Front Fees are income or revenues derived by ING as consideration for services rendered outside the Philippines. The Up-front Fees will be paid to ING for its services in facilitating the Bridge Loan for Unified. Since ING is a non-resident foreign corporation not engaged in trade or business in the Philippines, and the services were rendered outside the Philippines, the Up-front Fees will not be considered as taxable income of ING derived from sources within the Philippines. The National Internal Revenue Code ( "Tax Code" ) clearly states that the income of a non-resident foreign corporation is taxed in the Philippines only if the said income is derived from sources within the Philippines. This is pursuant to the provisions of Section 28 (B) (1) of the Tax Code which provides: "(B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." (Emphasis supplied) ADTEaI In defining what income payments are considered from sources without the Philippines, Section 42 (C) of the Tax Code provides: "Section 42. Income from Sources Within the Philippines. (C) Gross income from sources without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gain, profits and income from the sale of real property located without the Philippines." (Emphasis supplied) Prior to entering the loan agreement, ING caused the drafting of the Bridge Loan in Singapore and secured necessary legal opinions in Singapore on the legality of the Bridge Loan. All these facilitation services were performed outside the Philippines, particularly in Singapore. Thus, the Upfront Fees is an income from sources outside the Philippines, being a compensation for personal services performed without the Philippines. In BIR Ruling No. DA-036-2007 dated January 24, 2007, this Office ruled that ING is a foreign corporation not engaged in trade or business in the Philippines and as such the upfront fees it derived from another borrower from the Philippines is not subject to Philippine income tax. Thus: aCTHDA "As a general rule, foreign corporations not engaged in trade or business in the Philippines such as Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation are taxed only on Philippine-sourced income (Sec. 28 (B) (1), 1997 Tax Code, as amended). In the case of services, the situs of taxation is the place where the service is rendered, regardless where the payment is made. Thus, fees for services rendered outside the Philippines are considered foreign-sourced income and will not be subject to Philippine income tax (Sec. 42 (C), 1997 Tax Code, as amended). "xxx xxx xxx Accordingly, this Office hereby confirms that since the Agents' Fees to be paid to Mizuho Corporate Bank, Ltd. and the Upfront Fee and Cancellation Fee as well as the Commitment Fee to be paid to Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation are for services performed outside of the Philippines, they are considered income derived from sources outside the Philippines and therefore, are not subject to final withholding tax in the Philippines, pursuant to Section 28 (B) (1) in relation to Section 42 (C) of the 1997 Tax Code, as amended." (Emphasis ours) Likewise, the Up-front Fees is not subject to VAT since it is payment for services rendered outside the Philippines. In defining the phrase "sale or exchange of services" subject to 10% (now 12%) VAT, Section 108 of the National Internal Revenue Code (the "Tax Code") provides: "xxx xxx xxx The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, . . . ." (Emphasis ours) The VAT imposed under Section 108 of the Tax Code applies only to services performed in the Philippines and not to services rendered outside the Philippines. Clearly, the same Section 108 is not applicable in the case of ING since the Up-front Fees are payment for facilitation services rendered outside the Philippines. In BIR Ruling No. DA 037-2004 dated February 2, 2004, this Office confirmed that the payments for services performed outside the Philippines are not subject to 10% (now 12%) VAT, to wit: aITECA "2. Pursuant to Section 108 (A) of the Tax Code of 1997 a VAT equivalent to ten percent (10%) of gross receipts is imposed on the sale or exchange of services, and the use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. Conversely, services performed outside the Philippines are not subject to VAT. Accordingly, VSLPH's payment of service fee to VSLHK pursuant to the aforementioned Service Agreement, shall not be subject to VAT. Consequently, no VAT may be passed on by VSLHK to VSLPH, as conversely suggested under Section 105 of the Tax Code of 1997. B) Tax Rate on Interest The Interest payable by Unified to ING is subject to the 10% tax rate provided under the provisions of Article 11 of the RP-Netherlands Tax Treaty, which provides, to wit: "1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 percent of the gross amount if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 percent of the gross amount of the interest in all other cases." (Emphasis supplied) In BIR Ruling No. 057-97 dated May 15, 1997, this Office interpreted the afore-quoted provisions of the RP-Netherlands Tax Treaty and confirmed the applicability of the 10% tax rate to RBC Finance B.V., a finance company organized under the laws of The Netherlands to wit: TSCIEa "Accordingly, your opinion that interest payments which a Philippine resident shall pay to RBC Finance B.V. shall be subject to the 10% withholding tax rate pursuant to the aforequoted provisions of the RP-NetherlandsTaxTreaty is hereby confirmed." The applicability of the 10% tax rate on interest under RP-Netherlands Tax Treaty was consistently applied by this Office in a number of rulings, including ITAD Ruling No. 092-03 dated July 5, 2003, which reads, to wit: "Based on the afore-quoted provisions, interest payments by a Philippine resident to residents of the Netherlands, Germany and Japan who are the beneficial owner of the interests, will be taxed at a preferential rate of not exceeding ten per cent (10%) if the interest is paid in respect of any loan of whatever kind granted by a bank or any other financial institution, or if the company paying the interest, being the resident of the Philippines, is registered with the Board of Investments and is engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines." The aforesaid 10% tax treaty rate in the RP-Netherlands Tax Treaty will apply notwithstanding that the lender is lending through its branch office in Singapore. Being a mere branch office, ING Bank N.V. Singapore Branch has no separate and distinct personality from ING Bank N.V.. The provisions of the RP-Netherlands tax treaty will still apply to its Singapore Branch. In BIR Ruling No. 164-95 dated October 23, 1995, this Office had sustained the applicability of the provisions of the RP-Austria Tax Treaty on a loan granted by the Hongkong Branch of a company organized under the laws of Austria, to wit: "The fact that the loan was secured through the Hongkong branch of LBA does not affect the tax treatment of interest earned therefrom, considering that a branch has no distinct or separate juridical personality from that of its mother company ." (Emphasis supplied) Furthermore, the said BIR Ruling No. 164-95 was reiterated in ITAD Ruling No. 099-03 dated July 16, 2003, wherein this Office categorically declared that a loan obtained through the branch office will not set aside the applicability of the tax treaty rate available to the parent company. It was stated that: cAHDES "In reply, please be informed of the following: 1. Whether a loan obtained through the branch sets aside the residence of the parent company in favor of the branch for tax treaty relief purposes. The mere fact that the participation of a parent company as lender under a loan agreement is made through a branch does not obviate the operation of the provisions of the tax treaty with the residence country of the former since a branch has no distinct and separate juridical personality from that of its parent company. Thus, in a case involving a loan contracted by a Philippine corporation with the Hong Kong branch of a bank organized and existing under Austrian law, the BIR, in applying the provisions of the RP-Austriataxtreaty, ruled that: "The fact that the loan was secured through the Hong Kong branch of LBA (the Austrian parent company) does not affect the tax treatment of interest earned therefrom, considering that a branch has no distinct and separate juridical personality from that of its mother company." [BIR Ruling No. 164-95 dated October 23, 1995] (Emphasis ours) Considering the foregoing, this Office opines that the applicable tax rate on the Interest payable by Unified to ING is the 10% preferential tax treaty rate under the RP-Netherlands tax treaty. 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. IDTSaC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service