Tax Implications of the Issuance of Collateralized Notes by Quezon Power Ltd.

February 10, 1998 BIR RULING NO. 018-98 RP-US Tax Treaty 000-00-18-98 Sycip, Salazar, Hernandez & Gatmaitan All Asia Capital Center 105 Paseo de Roxas 1226 Makati City Attention: Attys . Ray C . Espinosa and Ernesto S . Taino , Jr . Gentlemen : This refers to your letter dated April 1, 1997 requesting on behalf of your client, QUEZON POWER (PHILIPPINES), LIMITED CO . (QPLC for brevity), for confirmation of your opinion that the issuance of certain collateralized notes by QPLC will constitute a public issue of bonded indebtedness subject to the preferential tax rate of 10% pursuant to the RP-US Tax Treaty. It is represented that QPLC is a Philippine limited partnership which will construct, own and operate an approximately 440 MW (net) coal-fired power generation facility to be located at Mauban, Quezon; that QPLC will sell all of its power to Manila Electric Company (MERALCO) pursuant to a 25-year power purchase agreement; that QPLC is planning to issue up to $250,000,000 in aggregate principal amount of Senior Secured Notes which will be secured by payments received under the Power Purchase Agreement as well as the company's rights under other project contracts and substantially all of its fixed assets; that the Notes will be offered and sold to the public at large in a public offering; that as required under the United States Securities Act of 1993, the Notes will be registered under the said Act and the offering will be approved by the United States Securities and Exchange Commission (U.S. SEC); that the registration will involve, among others, the filing of a comprehensive registration with US SEC and the approval of the prospectus and other offering materials to be distributed to the public; and that he outstanding Notes as registered securities will be freely tradable in the public market by the holders thereof, and no transfer restrictions under the U.S. Securities Act will be applicable. In reply, please be informed that Article 12, paragraphs (1), (3) and (7) of the RP-US Tax Treaty provides, viz: "(1) Interest derived by a resident of one of the Contracting State from sources within the other Contracting State may be taxed by both Contracting States . "(2) . . . "(3) Interest by a resident of one of the Contracting State from sources within the other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by other Contracting State at a rate in excess of 10 per cent of the gross amount of such interest LLpr xxx xxx xxx "(7) The term "interest" as used in the Convention means income from debt claims of every kind, . . . income from government securities and income from bonds or debentures, . . . " ( Emphasis supplied ) Based on the foregoing, and since the Notes will be issued and sold to the public through a public offering that will require its registration as securities under the U.S. Securities Act and will be secured by QPLC's rights under the Power Purchase Agreement, other project contracts and substantially all of its fixed assets, the same will qualify as a "public issue of bonded indebtedness". Such being the case, the interest income to be paid to the registered holders of the Notes shall be subject to the preferential tax rate of 10% pursuant to the aforequoted provisions of RP-US Tax Treaty. This ruling is being issued on the basis of your representation. However, if it turns out later in an investigation that the facts are different from those as represented, this ruling shall be considered null and void. LexLib Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue