Whether Royalties Paid by the Philippine Malaysia Water Consortium, Inc. (PMWC) to Its Financial Adviser are Subject to the Preferential Rate of 15% Final Withholding Tax under the RP-UK Tax Treaty

June 19, 1995 BIR RULING NO. 096-95 28 (b) (6) 000-00 096-95 SGV & Co. Ayala Avenue Makati City, Metro Manila Attention: C . P . Noel Tax Division Gentlemen : This refers to your letter dated January 8, 1995 requesting in effect for a confirmation of your opinion that royalties paid by your client, the Philippine Malaysia Water Consortium, Inc. (PMWC) to its financial adviser, Schroder Wagg & Co. Limited (Schroder), are subject to the preferential rate of 15% final withholding tax under the RP-UK Tax Treaty. prcd It is represented that PMWC is a company incorporated under the laws of the Philippines; that said corporation is tasked with the financing/design/construction, management and operation of the South Metro Manila Water Supply Project; that Schroder has been chosen to be the financial advisor of PMWC in connection with the aforementioned project; that an agreement to this effect was entered into whereby Schroder (Advisor) shall have, among others, the following responsibilities, to wit: "1. The Advisor will advise the Company on the arrangement of financing and all related matters and project contracts, relating to the debt and equity financing of the Company with the objective of assisting the Company in obtaining the award of the Concession from the Authority and in successfully financing the Company in undertaking the Project. "2. The Advisor will advice on the Company's overall financial plans including but not limited to: "o the financial objectives of the Company; "o identification and assessment of all sources and conditions of financing and advice on the particular sources of each which should be preferred; "o benefits, costs and constraints to the Company of alternative capital structures; and "o assist in the proposal clarification after it is submitted to the Authority. "3. The Advisor will develop a financial model and recommend certain adjustments and changes as the project progresses with the objective of determining a Base Case Model for the purpose of seeking financing and/or raising Equity. "4. The Advisor will develop a finance plan as the concession negotiations progress and review and revise this should the project scenarios alter. The finance plan will show: "o the envisaged debt/equity ratio "o identify the potential sources of raising debt "o loan repayment schedules and final maturities "o to the equity structure and shareholder returns "5. The Advisor will advise on the contractual structure and on the detailed documentation to be adopted or to be amended insofar as they affect the financing and the likelihood of raising finance, including the terms of the following documents (if any): "o Concession Agreement "o Construction Contract "o Management and Operations Contract "o Shareholders' Agreement "o Loan and Security Agreements "o Insurance Arrangements "o Other contracts and documents as may be appropriate "6. The Advisor will prepare and develop a detailed financing term sheet based on the finance plan; and "7. Advise and prepare the detailed financing memorandum to solicit debt for the Company." that for the technical assistance services, PMWC shall thereafter pay Schroder service fees. cdpr In reply, please be informed that your opinion that the service fees/royalties being paid by your client to Schroder are subject to the preferential rate of 15% final withholding tax pursuant to the RP-UK Tax Treaty, is hereby confirmed. Under Article 11(2) of the RP-UK Tax Treaty, it is provided that: "Art. 11. Royalties. xxx xxx xxx (2) Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: a) 15 percent of the gross amount of the royalties, where the royalties are paid; xxx xxx xxx i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity; Under the above provision, the 15% withholding tax rate on royalties will apply if the payor of the royalties is a Philippine enterprise registered with the Board of Investments (BOI) as engaged in preferred areas of activity. Considering that your client's application for registration has been approved by the BOI, the 15% tax rate will apply. llcd The term "royalties" has been defined under the RP-UK Tax Treaty as follows: "(3) The term 'royalties' as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematographic films, and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." Section 36(4)(C) of the Tax Code, provides in part as follows: "Sec. 36. Income from Sources within the Philippines . (a) Gross income from sources within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines. xxx xxx xxx (4) Rentals and Royalties xxx xxx xxx (C) Supply of scientific, technical, industrial or commercial knowledge or information; xxx xxx xxx (F) Technical advice, assistance or service rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme. Such being the case and based on the foregoing definitions, the service fee payments by your client to Schroder is considered as royalty income, subject to the preferential rate of 15% 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, this ruling shall be considered null and void. Very truly yours, RENE G. BAEZ Acting Commissioner