Actual Amount of Interest Payments as Tax Base for Withholding Tax Assumed by Domestic Corporation

August 24, 2005 BIR RULING NO. 015-05 RMC No. 46-77 Laya Mananghaya & Co . 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty . Francisco G . Tagao and Atty . Ma . Carmela M. Peralta Gentlemen : This refers to your letter dated August 22, 2005 stating that your client, Asia Recovery Corporation ("ARC"), is a domestic corporation engaged in the business of purchasing, subscribing, acquiring, owning, exchanging or otherwise disposing of real and personal property of every kind and description, including but not limited to shares of stock, debentures, notes, evidences of indebtedness and other securities; that Cooperative Centrale Raiffeisen Boerenleenbank B.A. (Rabobank Nederland) ["Rabobank"] is a commercial bank organized under the laws of the Netherlands; that Rabobank is not engaged in trade or business in the Philippines and does not have a foreign currency deposit unit ("FCDU") or offshore banking unit ("OBU") in the Philippines; that on June 02, 2002, ARC and the Singapore branch of Rabobank ("Rabobank-Sing") entered into a Purchase Agreement whereby Rabobank-Sing agreed to purchase interest-bearing senior notes to be issued by ARC; that subsequently, ARC issued to Rabobank-Sing Senior Note 1, dated August 06, 2002, with a face value of US$60 Million; and that under Annex "A" of the Purchase Agreement, ARC will shoulder the applicable Philippine withholding tax on the interest payments made to Rabobank-Sing. SHaATC Based on the foregoing representations, you now request confirmation of your opinion that the tax base for the withholding tax assumed by ARC on interest payments to the Rabobank-Sing should be the actual amount of the interest payments and not the grossed-up amount of such payments. It is your opinion that this is for purposes of making foreign creditor banks not having OBUs and FCDUs at par with foreign creditor banks having FCDUs or OBUs and of reducing the tax burden of the local borrowers. In reply thereto, please be informed that this Office has adopted measures for local institutions to be at par with non-resident creditors and to lessen the tax burden of local borrowers. Thus, the answer in Suggestion 5 of Revenue Memorandum Circular ("RMC") No. 46-77 states that: "This Office, aware of the present international banking practice of making the borrower assume the tax on the creditor's interest income and considering that one of the reasons for the establishment of OBU's is to lower the cost of borrowed funds, OBU's will be allowed to report for tax purposes only the actual amount of interest without considering as additional taxable income the tax assumed by the borrower. This will place OBU's at par with non-resident creditors and lessen the tax burden of local borrowers ." Pursuant to the above-quoted provision, this Bureau has allowed local borrowers of OBUs and FCDUs not to gross-up the interest payments for purposes of the applicable withholding tax assumed by them with respect to loans obtained from OBUs and FCDUs. This Office recognizes that this rule should also apply to the withholding tax assumed by local borrowers of foreign creditor banks not having OBUs and FCDUs in order to make such foreign creditor banks at par with foreign creditor banks having OBUs or FCDUs and to reduce the tax burden of the local borrowers. Otherwise stated, the withholding tax assumed by the local borrowers is not additional taxable income in the hands of such foreign creditor banks. If the assumed withholding tax will be based on the grossed-up amount of the interest payments, then the reason under RMC 46-77 for allowing OBUs and FCDUs not to report the tax assumed as additional taxable income will no longer prevail and will not reduce the local borrower's costs. Accordingly, this Office hereby confirms your opinion that the tax base for the withholding tax assumed by ARC on interest payments to the Rabobank-Sing should be the actual amount of the interest payments and not the grossed-up amount of such payments. 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue