BIR Ruling No. 110-11

April 11, 2011 BIR RULING NO. 110-11 Sec. 2.57.2 of RR 2-98, as amended by RR 17-03 n ; RMC No. 72-04; BIR Ruling No. 179-83; BIR Ruling No. 073-84; BIR Ruling No. DA-639-04 Masinloc Power Partners Co. Ltd. Masinloc Coal-Fired Thermal Power Plant Barangay Bani, Masinloc, Zambales Attention: Mr. Gustavo Luna Chief Operating Officer Gentlemen : This refers to your letter dated November 14, 2008 requesting for confirmation of your opinion that interest payments to be made by the Masinloc Power Partners Co. Ltd. ("MPPCL"), to the Masinloc AES Power Co. Ltd. ("MAPCL") on a loan extended by the latter to MPPCL are not subject to either the 2% CWT on income payments by the top ten thousand (10,000) private corporations to local/resident suppliers of goods or services or the 2% EWT on interest payments made to banks, quasi-banks, financial institutions, or lending investors. aSHAIC It is represented that MPPCL, with Taxpayer Identification No. 006-786-124-000, and MAPCL, with Taxpayer Identification No. 006-951-955, are both limited partnerships organized and existing under the laws of the Philippines; that MPPCL is registered with the Bureau of Internal Revenue (BIR) as a large taxpayer having been qualified as such by the BIR Commissioner under the jurisdiction of the Large Taxpayers Service; that MAPCL is the general partner in MPPCL and its business purpose, as stated in its Articles of Partnership, is as follows "To acquire by purchase, exchange, assignment, gift or otherwise, and to hold, own, and use for investment or otherwise, and to sell, assign, transfer, exchange, lease, let, develop, mortgage, pledge, deal in and with and otherwise operate, enjoy and dispose of, any and all properties of every kind and description and whenever situated, as and to the extent permitted by law, including, but not limited to, bonds, debentures, promissory notes, shares of capital stock, or other securities and obligations, created, negotiated or issued by any corporation, association, or other entity, foreign or domestic and while the owner, holder, or possessor thereof, to exercise all the rights, powers, and privileges of ownership or any other interest therein, including the right to receive, collect and dispose of, any and all dividends, interests and income, derived therefrom, and the right to vote on any proprietary or other interest, on any shares of the capital stock, and upon any bonds, debentures, or other securities, having voting power, so owned or held, without however engaging in the business of an investment company under the Investment Company Act or a finance company or a broker or dealer in securities or stocks. [It is not engaged in the business of lending.]" that as part of an investment agreement to finance the acquisition of the 600 megawatt coal fired thermal power plant in Masinloc, Zambales, MPPCL and MAPCL entered into an AES Subordinated Loan Agreement dated March 18, 2008 ("Loan Agreement"), whereby MAPCL agreed to lend up to US$160 Million to MPPCL; that the loan shall bear interest at the rate of 8% per annum; that MAPCL is not a supplier from which MPPCL has transacted at least six transactions in the previous or current year for its only transaction with MPPCL is the extension of the above loan; and that the amount of US$160 Million was fully drawn as of April 14, 2008. In reply, please be informed that under Section 2.57.2 of Revenue Regulations (RR) 2-98, as amended by RR No. 17-03 income payments made by the top ten thousand (10,000) private corporations, including corporate taxpayers who have been classified as large taxpayers, to their local/resident suppliers of goods or services are subject to 1% CWT for suppliers of goods and 2% CWT for suppliers of services. The same section, however, defines a local/resident supplier, to wit: "The term "local/resident supplier of goods" pertains to a supplier from whom any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, regularly makes its purchases of goods. As a general rule, this term does not include a casual purchase of goods, that is, purchases made from non-regular suppliers and oftentimes involving single purchases. However, a single purchase which involves ten thousand pesos (P10,000.00) or more shall be subject to a withholding tax. The term "regular suppliers" refers to suppliers who are engaged in business or exercise of profession/calling with whom the taxpayer-buyer has transacted at least six (6) transactions, regardless of amount per transaction, either in the previous year or current year. The same rules apply to local/resident supplier of services other than those covered by separate rates of withholding tax." (Emphasis supplied) It appears from the foregoing that income payments made by the top 10,000 corporations to their local/resident supplier of goods or services shall be subject to 1% or 2% creditable withholding tax, respectively. However, this rule is not without an exception because it does not include casual purchase of goods or purchases made from non-regular suppliers (BIR Ruling No. DA-639-04 dated December 16, 2004) . Although MPPCL qualifies as a top ten thousand (10,000) private corporation after having been classified and duly notified by the Commissioner of Internal Revenue as a large taxpayer, MAPCL is not a local/resident supplier of goods or services as defined in Section 2.57.2 of Rev. Regs. 2-98 and thus interest payments made to it by MPPCL are not subject to CWT. In BIR Ruling No. 179-83 dated October 11, 1983 , the BIR ruled on whether or not the interest payments of Canlubang Automotive Service Corporation (CASCO) to Canlubang Automotive Resources Corporation (CARCO) on a loan agreement executed between them is subject to the expanded withholding tax, thus: HCTAEc "In reply, I have the honor to inform you that under Revenue Regulations No. 13-78, as amended by Revenue Regulations No. 6-79, implementing Presidential Decree No. 1351, now Section 53(f) of the Tax Code, payments only to persons enumerated therein are subject to the withholding tax. Considering that interest payments on a loan are not among those specified in said Regulations, said interest payments are not subject to the withholding tax." Also in BIR Ruling No. 073-84 dated April 23, 1984 , it was held that the interest payments to be made by the Polo Realty Corporation to its sister company, the St. Gabriel Realty and Development Corporation on loan made by the latter to the former is not subject to the expanded withholding tax "In reply, I have the honor to inform you that under Revenue Regulations No. 13-78, as amended by Revenue Regulations No. 6-79, implementing Presidential Decree No. 1351, now Section 53(f) of the Tax Code, payments only to persons enumerated therein are subject to withholding tax. Considering that interest payments on loans are not among those specified in said Regulations, said interest payments are not subject to the withholding tax." Further, it is evident from the business purposes of MAPCL, as stated in its Articles of Partnership, that it is not a bank, quasi-bank, financial institution, or lending investor. Hence, the interest payments made to it by MPPCL are not subject to the 2% Expanded Withholding Tax (EWT) under Revenue Memorandum Circular (RMC) No. 72-04 either, which applies only to payments to banks, quasi-banks, financial institutions, and lending investors. From the foregoing, this Office is of the opinion that and hereby confirms that interest payments to be made by MPPCL to MAPCL on a loan extended by the latter to the former are not subject to either the 2% CWT on income payments by the top ten thousand (10,000) private corporations to local/resident suppliers of goods or services or the 2% EWT on interest payments made to banks, quasi-banks, financial institutions, or lending investors. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Written as "RR 17-04" in the original document.