Quiason Makalintal Barot Torres & Ibarra

December 16, 2008 BIR RULING [DA-(C-174) 534-08] 28 (B); 42 (C); 105; 108; DA-036-07; 164-95; 057-97; DA-(C-013) 065-2008 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue corner Pedro Poveda Street 1605 Ortigas Center, Pasig City Attention: Attys. Ruelito Q. Soriano Benedict R. Tugonon and Mark S. Gorriceta Gentlemen : This refers to your letters dated December 9, 2008 and December 11, 2008 requesting on behalf of your clients First Gas Power Corporation and First Gas Holdings Corporation, for confirmation of your opinion that: 1. The following payments made to various non-resident payees are 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: a. the service fees payable by First Gas Power Corporation as consideration for various services such as loan structuring advisory, business or financial modeling, documentation, hedge advisory, technical and environmental advisory, and commercial insurance services (the "Arrangement and Work Fees"); b. the agency fees ("Agency Fees") payable by First Gas Power to Calyon, as the inter-Creditor Agent and Uncovered loan facility agent, and the Bank of Tokyo-Mitsubishi UFJ, Ltd., as the covered loan facility agent are not subject to income tax and value-added tax; c. the Political Risk Insurance Premium which First Gas Power is required to pay to the Bank of Tokyo-Mitsubishi UFJ, Ltd. as payment for premium on the Political Risk Insurance policies which the Bank of Tokyo-Mitsubishi will get in its favor and/or the covered loan facility lenders ("PRI Premium"); and aSTHDc d. the Annual Service Fees payable by First Gas Holdings to BG Asia ("Annual Service Fees"). 2. The interest due to the loan facility lenders under the Facility Agreement are subject to the preferential tax rates under the applicable tax treaties. It is represented that First Gas Holding Corporation is a domestic corporation with office address at 3rd Floor Benpres Building, Meralco Ave., cor. Exchange Road, Ortigas Center, Pasig City and it entered into an agreement for services dated November 10, 2008 ("Agreement for Services") with BG Asia a company organized under the laws of Singapore with head office address at 83 Clemenceau Avenue, #14-08 UE Square, Singapore 239920. Under the Agreement for Services, BG Asia will provide corporate support services outside the Philippines in connection with the set-up and ongoing administration of the refinancing facilities for the Sta. Rita Power Plant owned and operated by its subsidiary First Gas Power Corporation, which is also a domestic corporation with office address at 3rd Floor Benpres Building, Meralco Ave., cor. Exchange Road, Ortigas Center, Pasig City. First Gas Holdings, in return, will pay BG Asia the Annual Service Fees. As a result of the refinancing activities performed by BG Asia, on November 11, 2008, First Gas Power Corporation entered into a Facility Agreement ("Facility Agreement") with the following loan facility lenders ("Loan Facility Lenders"): (a) The Bank of Tokyo-Mitsubishi UFJ, Ltd., a bank and a public limited liability company organized under the laws of Japan, also acting as the covered loan facility agent; (b) CALYON a bank and a public limited liability company organized under the laws of France with head office address at 9 Quai Du President Paul Doumer 92920 Paris, La Defense Cedex, France and is acting through its Hong Kong Branch located at 30th Floor, Two Pacific Place 88 Queensway, Hong Kong and its Hongkong Branch are not engaged in trade or business in the Philippines, also acting as inter-creditor agent and the uncovered loan facility agent; (c) ING Bank N.V. Singapore Branch, 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, The 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; (d) Bayerische Hypo-Und Vereinsbank AG, Hongkong Branch, a bank and a public limited liability company organized under the laws of the Federal Republic of Germany; with head office address at the Munich, Germany, and is acting through its Hongkong branch with office located at 26 Floor, Man Yee Building 68 Des Voeux Road Central, Hong Kong and its Hong Kong Branch is not engaged in trade or business in the Philippines; AaCcST (e) KfW-IPEX Bank GmbH, a bank and a public limited liability company organized under the laws of the Federal Republic of Germany with office address at Palmengartenstr 5-9 60325 Frankfurt am Main, Germany; (f) Malayan Banking Berhad, a bank and a public limited company organized under the laws of Malaysia with head office address at 44th Floor Menara Maybank, 100 Jalantun Perar, Kuala Lumpur, Malaysia and is acting through its Singapore Branch located at Maybank Tower 2 Battery Road, Singapore and its Singapore Branch are not engaged in trade or business in the Philippines; (g) Standard Chartered Bank, a bank and a public limited liability company organized under the laws of the United Kingdom with head office address at 1 Aldermanbury Square, London, United Kingdom; and (h) Socit Gnrale Singapore Branch is a bank and a public limited liability company organized under the laws of France with head office address at the Tour S.G. 17 Cours Valmy Cedex 92972 Paris La Defense, France and is acting through its Singapore branch with office located at 80 Robinson Road, Singapore. Socit Gnrale and its Singapore Branch are not engaged in trade or business in the Philippines. Under the Facility Agreement, First Gas Power Corporation will pay the following to the Loan Facility Lenders: (a) Arrangement and Work Fees, to all Loan Facility Lenders, (b) the Agency Fees, to the facility agents, (c) the PRI premium, to the covered loan facility agent, and (d) interest under Section 2.5 of the Facility Agreement. In view thereof, you now request for confirmation of your opinion that the annual service fees payable to BG Asia and the Arrangement and Work Fees, Agency Fees and the PRI premium payable to the Loan Facility Lenders, the facility agents and the covered loan facility agent are income or revenues derived by the payees as consideration for services rendered outside the Philippines. Since the payees are non-resident foreign corporations not engaged in trade or business in the Philippines, and the services were rendered outside the Philippines, the said fees and premium will not be considered as taxable income derived from sources within the Philippines, pursuant to the provisions of Section 28 (B) (1) in relation to Section 42 (C) of the National Internal Revenue Code. You are likewise of the position that since the services by the non-resident payees were rendered outside the Philippines, the said fees are not subject to value-added tax under Section 108 of the National Internal Revenue Code. ECaTAI We reply, as follows: A. Offshore Fees & Premium The Arrangement and Work Fees are income or revenues derived by the Bank of Tokyo-Mitsubishi UFJ, Ltd., CALYON, Societe Generale, Bayerische Hypo-Und Vereinsbank AG, KfW-IPEX Bank GmbH, ING Bank N.V., Malayan Banking Berhad and Standard Chartered Bank as consideration for services rendered outside the Philippines. The Arrangement and Work Fees are paid in consideration for the various offshore services rendered by the payees, such as loan structuring advisory, business or financial modeling, documentation, hedge advisory, technical and environmental advisory, and commercial insurance services. Since all of the payees are non-resident foreign corporations not engaged in trade or business in the Philippines and the services were rendered outside the Philippines, the Arrangement and Work Fees will not be considered as taxable income of the payees derived from sources within the Philippines. Similarly, the Agency Fees payable to CALYON and the Bank of Tokyo-Mitsubishi UFJ, Ltd. and the Annual Service Fees payable to BG Asia are income or revenues of CALYON, Bank of Tokyo-Mitsubishi UFJ, Ltd. and BG Asia as consideration for services rendered outside the Philippines. Since the payees are non-resident foreign corporations not engaged in trade or business in the Philippines, and the services were rendered outside the Philippines, the Agency Fees and the Annual Service Fees will not be considered as taxable income of the payees derived from sources within the Philippines. The PRI Premium paid to Bank of Tokyo-Mitsubishi UFJ, Ltd. is not income on the part of the payee but as payment for the PRI insurance which the latter will secure for its benefit and that of the other covered loan facility lenders, the PRI premium is not payment for services or for insurance secured in the Philippines. As previously pointed out, since Bank of Tokyo-Mitsubishi UFJ, Ltd. is a non-resident foreign corporation not engaged in trade or business in the Philippines, the PRI Premium will not be considered as taxable income 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 C od e, 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%)." DcaCSE In defining what income payments are considered from sources without the Philippines, Section 42 (C) of the Tax Code provides: "Section 42 (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." In order to complete the Sta. Rita Power Plant loan refinancing, BG Asia undertook the negotiation with the Loan Facility Lenders which are all non-resident foreign corporations. Understandably, the discussion, negotiation and loan documentation were performed outside the Philippines. Thus, the Arrangement and Work Fees, Agency Fees and the Annual Service Fees are income from sources outside the Philippines, being compensation for personal services performed outside the Philippines. In BIR Ruling No. DA-036-07 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 is not subject to Philippine income tax. Thus: "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 C od e, 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 C od e, as amended). CTDHSE 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 C od e, as amended." Likewise the Arrangement and Work Fees, the Agency Fees, the PRI Premium and the Annual Service Fees are not subject to VAT since these are payments for services rendered outside the Philippines. In defining the phase "sale or exchange of services" subject to 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, . . ." 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 to the Loan Facility Lenders and BG Asia, since the Arrangement and Work Fees, the Agency Fees, the PRI Premium and the Annual Service Fees are payment for services rendered outside the Philippines. In BIR Ruling No. DA 037-04 dated February 2, 2004, this Office confirmed that the payments for services performed outside the Philippines are not subject to the 12% VAT. Thus: "2. Pursuant to Section 108(A) of the Tax C od e 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 Services 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 C od e of 1997." B. Tax Rate on Interest The Interest payable by First Gas Power Corporation to the Loan Facility Lenders are subject to the following tax treaty rates: (a) 10% under the provisions of Section 2 a of Article 11 of the RP-Netherlands tax treaty, Section 2 a (ii) of Article 11 of the RP-Germany tax treaty, and Section 2 (a) of the RP-Japan tax treaty; or (b) 15% under the provisions of Section 2 Article 10 of the RP-UK tax treaty, Section 2 of Article 11 of the RP-France tax treaty, and Section 2 of Article 11 of the RP-Malaysia tax treaty. In BIR Ruling No. 057-97 dated May 15, 1997, this Office interpreted the aforementioned 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: "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-Ne therla nds Tax Treaty is hereby confirmed." The applicability of the 10% tax rates on interest under RP-Netherlands, RP-Germany and RP-Japan Tax Treaties were consistently applied by the BIR in a number of rulings, including ITAD Ruling No. 092-03, which reads, to wit: ISTCHE "Based on the aforequoted 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." (Emphasis ours) The aforesaid tax treaty rates will apply notwithstanding that some lenders are lending through their branch offices in Hong Kong and Singapore. Being a mere branch office, ING Bank N. V. Singapore Branch, CALYON Hong Kong Branch, Malayan Banking Berhad Singapore Branch, Societe Generale Singapore Branch and Bayerische Hypo-Und Vereinsbank AG, Hong Kong Branch, have no separate and distinct personalities from their respective head offices in The Netherlands, France, Malaysia and Germany. The provisions of the RP-Netherlands tax treaty still apply to ING Bank N.V. Singapore. The provisions of the RP-France tax treaty still apply to CALYON Hong Kong Branch and Societe Generale Singapore Branch. The provisions of the RP-Malaysia tax treaty will apply to Malayan Banking Berhad Singapore Branch. The provisions of the RP-Germany tax treaty will apply to Bayerische Hypo-Und Vereinsbank AG, Hong Kong 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: DSHTaC ". . . 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." 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: "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-A ustri a tax treaty, 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. 1 6 4-95 dated October 23, 1995]" Considering the foregoing, this Office opines that the applicable tax rates on the Interest payable: (a) to Bank of Tokyo-Mitsubishi UFJ, Ltd. is the 10% preferential tax treaty rate under the RP-Japan tax treaty; (b) to CALYON Hong Kong Branch and Societe Generale Singapore Branch is the 15% preferential tax treaty rate under the RP-France tax treaty; (c) to Bayerische Hypo-Und Vereinsbank AG Hong Kong Branch and KfW-IPEX Bank GmbH is the 10% preferential tax treaty rate under the RP-Germany tax treaty; (d) to ING Bank N.V. Singapore Branch is the 10% preferential tax treaty rate under the RP-Netherlands tax treaty; (e) to Malayan Banking Berhad Singapore Branch is the 15% preferential tax rate under the RP-Malaysia tax treaty; and (f) to Standard Chartered Bank is the 15% preferential tax treaty rate under the RP-UK Tax Treaty. aHCSTD 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service