Follosco Morallos & Herce

December 4, 2008 BIR RULING [DA-(C-163) 498-08] Sec. 32 (B) (7) (a), Tax Code; BIR Ruling Nos. 285-82; DA-503-05; 93-96 Follosco Morallos & Herce Suite 2500, 25th Floor, 88 Corporate Center 141 Valero Street corner Sedeo Street Salcedo Village, Makati City Attention: Attys. Rachel P. Follosco and Froilyn D. Pagayatan Gentlemen : This refers to your letter dated June 16, 2006 requesting confirmation of your opinion that any income derived from the investments of Aureos South-East Asia Fund, L.L.C. ("ASEAF") is exempt from Philippine income tax pursuant to Section 32 (B) (7) (a) of the Tax Code, as amended. You have represented that ASEAF is a limited private company incorporated in the Republic of Mauritius on April 13, 2004 whose primary purpose is to engage in the business of investment and in particular, to identify, research, negotiate, make, and monitor the progress of and sell, realize and exchange investments and distribute the proceeds of such investments to investors with the principal objective of providing such investors with a high relative rate of return by means of both income and capital growth. You have also represented and provided documentation to prove that the investors of ASEAF are the Asian Development Bank ("ADB"), Norwegian Investment Fund for Developing Countries ("Norfund"), and Commonwealth Development Group plc ("CDC"), hereinafter collectively referred to as "Investors". It is also represented that the Investors subscribed to the shares of the ASEAF by way of capital contributions subject to the following initial commitments: TcHDIA Investor Commitment Commitment US$ (No. of A Ordinary Shares to be subscribed) Norfund 20,000,000 20,000,000 CDC 20,000,000 20,000,000 ADB 20,000,000 Whichever is lesser of: (i) 25% of the sum total of Total Commitments and Total Co-Investor Commitments (as that term is defined in the Management Agreement); and (ii) US$20,000,000 Such capital contributions shall be invested by ASEAF in private enterprises in Southeast Asian countries such as the Philippines. All proceeds and income received by ASEAF from its investments shall be distributed to the Investors in the form of dividend payments in proportion to their respective capital contributions. The documents presented show that the ADB is an international organization committed to carry out investments in private sector enterprises in the Philippines both by way of equity and by way of loans without government guarantees. The exemption of ADB from taxation and from withholding or collecting taxes on any income and gains from, and sale proceeds of, its equity investments and the principal of and interest and other charges from its loans was confirmed by the Department of Finance in a December 23, 2003 confirmation letter. CDC, on the other hand, was recognized by the Republic of the Philippines as a financing institution owned and controlled by the United Kingdom government and is exempt from indirect taxes, levies, deductions and other imposts of any kind in the Philippines pursuant to an Agreement between the Philippines and the United Kingdom signed on September 3, 1997. Finally, Norfund is a Norwegian development financial institution wholly-owned by the Norwegian government which invests risk capital in profitable private enterprises in most countries of Africa, Asia, Latin America, and the Balkans and it receives its investment capital from the Norwegian government on an annual basis. It is the same Norfund recognized in BIR Ruling No. DA-503-05 dated December 15, 2005 as a financial institution that is entirely owned and financed by the Norwegian government. DcIHSa Based on the foregoing representations, you now request for a ruling that any income derived from investments of ASEAF in the Philippines such as interest on loans, interest on deposits, interest on bonds, dividends and capital gains on the sale of shares of stock, bonds and other domestic securities, are exempt from Philippine income tax and withholding tax pursuant to Section 32 (b) (7) (a) of the Tax Code. In reply, please be informed that under Section 32 (B) (7) (a) of the Tax Code, income 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 financing institutions established by foreign governments are excluded from gross income and shall be exempt from taxation. This Office has already issued rulings that CDC and Norfund are financing institutions owned and controlled by foreign governments, as contemplated in Section 32 (B) (7) of the Tax Code (BIR Ruling No. 174-91 dated September 6, 1991; ITAD Ruling No. 175-02 dated October 9, 2002; BIR Ruling No. DA-503-05 dated December 15, 2005). This Office has likewise issued rulings that ADB is an international financing institution exempt from any and all taxation on any income and gains arising out of its equity investments in the Philippines pursuant to the Agreement Establishing the Asian Development Bank ("ADB Charter") of which the Philippines is a signatory (BIR Ruling No. 247-05 dated June 8, 2005; BIR ITAD Ruling No. 110-01 dated October 30, 2001). IATHaS Moreover, in BIR Ruling No. 285-82 dated November 16, 1982, this Office ruled that ". . . income received by foreign governments, financing institutions owned, controlled, or enjoying refinancing by foreign governments and international or regional financing institutions established by governments and international or regional financing institutions established by governments from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines is exempt from income tax in accordance with Section 29(c)(8)(A)(1)(2) and (3) of the Tax C od e, as amended. In the instant case, since SBI is 55% owned by SBI which, in turn, is wholly owned by the Government of Belgium, SBI could be considered as controlled by said foreign government. A controlled corporation may be defined as a corporation more than fifty per cent (50%) of whose total combined voting power is owned by the shareholder(s) alleged in control in the particular case. Accordingly, the interest payments which will be remitted to SBI by PDCP are not subject to Philippine income tax, and consequently, not also subject to the withholding tax provisions of Section 53(b)(2) in relation to Section 54 of the Tax C od e." Hence, financing institutions which are ultimately-owned and controlled by the UK and Norway governments through the CDC and Norfund, respectively, have been considered as financing institutions within the contemplation of Section 32 (B) (7) (a) of the Tax Code, and therefore, exempt from Philippine income tax (BIR Ruling No. DA-503-05 dated December 15, 2005). Therefore, in BIR Ruling No. 013-96 dated February 14, 1996, we ruled that "In reply, please be informed that since CDCH is a wholly-owned subsidiary of CDC which is a British Government owned or controlled instrumentality, as earlier confirmed by then Secretary of Finance Cesar Virata in his letter dated November 9, 1977, this Office is of the opinion that CDCH should also be considered as a financing institution owned, controlled or enjoying refinancing from the British government as contemplated in Section 28(b)(8)A)(ii) of the Tax Code, as amended. Accordingly, the income to be received by CDCH from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on its deposits in banks in the Philippines shall not be subject to Philippine income tax and consequently to the withholding tax." cAEDTa Based on your representations, ASEAF may be considered as a financing institution owned and controlled by foreign governments since two-thirds (2/3) of its capital stock is ultimately owned by the UK government, through CDC, and the Norway government, through Norfund. Thus, any income derived by ASEAF from its investments in the Philippines such as interest on loans, interest on deposits, interest on bonds, dividends, and capital gains on sale of shares of stock, bonds, and other domestic securities which are ultimately distributed to ADB, CDC, and Norfund in the form of dividends, are exempt from Philippine income tax pursuant to Section 32 (B) (7) (a) of the Tax Code. In addition, the dividends to be paid by ASEAF to ADB, CDC and Norfund shall not be subject to Philippine income tax and, consequently, to withholding tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. cHCaIE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service