Interest Derived by Societe Generale from Participation in the US$ 55M - Smart Communications Syndicated Loan ("the Loan"), Transferred to SGManila-OBU Upon Its Registration with the SEC and Commencement of OBU Operations Subject to 10% Withholding Tax Rate

August 6, 1997 BIR RULING NO. 086-97 25 (a) (4) 000-00 086-97 Sycip, Gorres & Velayo 6760 Ayala Avenue Makati City Attention: J . A . Osana Tax Division Gentlemen : This refers to your request dated July 17, 1997 requesting confirmation of your opinion in behalf of your client, Societe Generale that interest derived by it from its participation in the US$ 55M Smart Communications Syndicated Loan (" the Loan "), transferred to SGManila-OBU upon its registration with the SEC and commencement of OBU operations, shall be subject to 10% withholding tax rate under Section 25(a)(4) of the Tax Code, P.D. 1034, and Revenue Regulations (RR) 10-76; and where Societe Generale's participation in the loan, pending its transfer to SGManila-OBU prior to issuance by the SEC of the branch license, the interest accruing on the loan shall be subject to the 15% final withholding tax (FWT) pursuant to the RP-France Tax Treaty, not to the 20% final withholding tax (FWT) under Section 25(b)(5)(A) of the Tax Code. It is represented that Societe Generale, is a corporation organized and existing under the laws of the Republic of France; that Societe Generale has a Representative Office in Manila and a branch in Hong Kong (" SGHK "); that at about the time of the negotiation and execution of the loan Societe Generale has secured authority/license to operate an Offshore Banking Unit (" OBU ") from the Bangko Sentral ng Pilipinas (" BSP "); that the Loan Agreement was signed by the parties on October 7, 1996, and the first drawdown was made on October 24, 1996; that as early as October 2, 1996 the BSP has officially informed Societe Generale that its application for the establishment of an OBU has been granted; that the Official Certificate for the OBU was issued by the BSP on October 23, 1996; that currently, Societe Generale's application for the establishment of the Branch is pending with the Securities and Exchange Commission; that it is expected that the SEC registration of SGManila-OBU will be accomplished within the next two months; that Societe Generale is one of the creditors participating in the US$ 55 Million Smart Communications Syndicated Loan facilitated by ING Bank Manila; that Societe Generale's participation in the loan amount to US$ 5 Million; that since SGM-OBU has not yet been registered with the SEC at the time of the negotiation and execution of the loan, Societe Generale's participation therein was initially booked with SGHK; that the loan participation will be transferred to SGManila-OBU upon its registration with the SEC and commencement of OBU operations. In reply, please be informed that your opinion that interest derived by Societe Generale from its participation in the loan, transferred to SGManila-OBU upon its registration with the SEC and commencement of OBU operations, shall be subject to 10% withholding tax rate under Section 25(a)(4) of the Tax Code, P.D. 1034, and Revenue Regulations (RR) 10-76, is hereby confirmed. Section 25(a)(4) of the Tax Code provides as follows: "(4) Offshore Banking Units . The provision of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Central Bank of the Philippines from foreign currency transactions with non-residents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the Central Bank to transact offshore banking units shall be exempt from all taxes except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board, to be subject to the normal income tax payable by banks; provided, that any interest income derived from foreign currency loans granted to residents other than offshore banking units or local branches of foreign banks that may be authorized by the Central Bank of the Philippines to transact business with offshore banking units, shall be subject only to a 10% tax ." Relative thereto is Revenue Memorandum Circular (RMC) 46-77 which published the answers to the suggestions/questions interpreting PD 1034 and PD 1035 which states in its answer to "Question 10-B: that a foreign bank which operates an OBU branch in the Philippines is considered as a resident foreign corporation. Revenue Regulations No. 4-75 defines a foreign loan as loan contracts, . . . which are payable in foreign currency . . . entered into by a Philippine resident, corporate or otherwise, with a non-resident." Considering that Societe Generale has already obtained authority/license from the BSP to establish an OBU at the time of the negotiation and execution of the loan and that, it was actually the intention that Societe Generale's participation in the loan be later on transferred to SGManila-OBU once the latter has started its operation, therefore, the tax benefit granted to OBUs for a lower withholding tax of 10% should be applied. Moreover, this Office confirms that prior to the issuance by the SEC of the branch license to SG Manila-OBU and the transfer of the loan participation thereto, the interest accruing on the loan shall be subject to the 15% FWT pursuant to the RP-France Tax Treaty, not to the 20% FWT under Section 25(b)(5)(A) of the Tax Code. Article II of the RP-France Tax Treaty provides: "1. Interest arising in a Contracting State paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 15 percent of the amount of the interest. xxx xxx xxx" Accordingly, the applicable withholding tax rate on the interest which will be derived by SGHK while the participation in the LOAN is booked with it is only 15%. However, confirmed earlier, after SGHK transfers its participation in the loan to SGManila-OBU, the interests on the loan shall be subject to the 10% final withholding tax pursuant to Section 25(a)(4) of the Tax Code, in relation to P.D. 1034, and Revenue Regulations (RR) 10-76. Furthermore, a loan extended by the home office to a local non-bank corporation, whether or not booked by the OBU will be attributed or imputed to the OBU branch. For income tax purposes, the interest on such loan will be considered as an onshore interest income subject to the 10% final withholding tax, not as interest on a foreign loan subject to 20% final withholding tax. 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. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue