Interest Income to Be Paid by BPPC to Registered Holders of Notes, Subject to 10% Preferential Tax Rate

May 21, 1998 BIR RULING NO. 062-98 27 (b) (1)-000-00-062-98 Puno & Puno Law Offices 12th Floor East Tower Philippine Stock Exchange Center Exchange Road, Ortigas Center Pasig City Attention : Atty . Roderico V . Puno Gentlemen : This refers to your letters dated October 16, 1995 and May 29, 1996 requesting, on behalf of your client, Bauang Private Power Corporation (BPPC for brevity), for a confirmation of your opinion that the interest income which BPPC will pay to the registered holders of the Notes which BPPC will issue is subject to the preferential tax rate of 10% pursuant to the RP-US Tax Treaty. It appears that BPPC is registered with the Board of Investments as a pioneer enterprise operating a diesel-fired power generation facility; that on March 15, 1993, BPPC, by virtue of an Accession Undertaking formalized by and among the National Power Corporation (NPC), First Private Power Corporation (FPPC) and BPPC, your client was made a party to the Fast Track Build Operate-Transfer Project Agreement between the NPC and FPPC executed on January 12, 1993; that under the Agreement, as amended, BPPC is responsible for developing, constructing and operating a 215-megawatt power station in Bauang, La Union; that the Project was initially financed through BPPC's dollar denominated borrowings under different loan agreements with: (a) a syndicate of various Philippine commercial banks led by the Philippine Commercial International Bank (the FCDU's); (b) the Development Bank of the Philippines; and (c) the Philippine American Life Insurance company; that NPC's credit standing for financing purposes for the Project was enhanced by a Performance Undertaking dated 7 April 1993 issued by the Republic of the Philippines through the Department of Finance which is covered by a Full Powers Authorization issued by President Fidel V. Ramos on March 29, 1993; that in order to refinance the costs of constructing, equipping and development of the BPPC Plant by way of prepaying outstanding obligations with the FCDUs, BPPC issued US$85,000,000.00 in aggregate principal amount of its 10.17% Senior Secured Notes due 2008 under a Trust Indenture, that prior to the issuance of the Notes, your client secured the approval of the Bangko Sentral ng Pilipinas (BSP) in compliance with the conditions of the BSP approval of the BOT Agreement and the provisions of BSP Circular 1389; that the Monetary Board, in its Resolution No. 850 dated August 2, 1995, approved the issuance by BPPC of the Notes under the terms of the covering Loan Summary Sheet; that the initial purchasers of the Notes are twenty-three (23) corporations or individuals holding denominations of between One Thousand US Dollars (US$1,000.00) to Fifteen Million US Dollars (US$15,000,000.00); that the Notes will be resold to twenty (20) or more investors and BPPC expects the number of the investors to increase as the Notes are further traded; that under the Trust Indenture, principal of premium, if any, and interest on the Notes will be payable at the office of Manhattan Bank, N.A., an American corporation with principal address located at 4 Chase Metrotech Center, Brooklyn, New York, New York which was designated as Trustee, principal Paying Agent, Security Registrar and Authorized Agent thereunder for the benefit of the registered holder of Notes; and that all the registered holders of the Notes, do not have permanent establishments in the Philippines, and shall continue to be residents of countries whose tax treaties provide for ten percent (10%) rates with respect to public issues of bonded indebtedness. In reply, please be informed that Article 12, paragraphs (1), (3) and (7) of the RP-US Tax Treaty provides, viz: " Article 12 " INTEREST "(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 derived 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 the other Contracting State at a rate in excess of 10 per cent of the gross amount of such interest . LLphil xxx xxx xxx "(7) The term "interest" as used in this Convention means income from debt claims of every kind, . . . income from government securities and income from bonds or debentures, . . ." (Emphasis supplied) The term "bond" is a very broad term. Fundamentally, it is an obligation; a written promise to pay money. It is thus similar to, and may be said to be a form of a promissory note. (par. 25, 11 Am Jur 2nd) Since, under the Trust Indenture, principal of the premium and interest on the Notes will be payable at the Office of Manhattan Bank, N.A. which was designated as Trustee, principal paying Agent, Security Registrar and Authorized Agent, the Notes are considered as bonded indebtedness. Moreover, the Notes will also qualify as a public issue of bonds or bonded indebtedness considering that the initial purchasers are the 23 corporations or individual holders of between US$1,000.00 to US$15,000,000.00 which will be resold to 20 or more investors and may be further increased as the Notes are traded. Accordingly, we hereby confirm your opinion that the aforedescribed transactions in respect of which BPPC issued the Notes is a "public issue of bonded indebtedness" since the Notes are issued primarily for the continued existence, operation and maintenance of your client's Plant which supplies electrical energy to the Luzon Distribution Grid. Such being the case, the interest income to be paid by BPPC to the registered holders of the notes is subject to a preferential tax rate of 10% pursuant to the aforequoted provisions of the RP-US Tax Treaty. The Notes, however, shall be subject to the documentary stamp tax imposed under Section 174 of the Tax Code of 1997. 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, then this ruling shall be considered null and void. prcd Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue