BIR Ruling No. 294-12

May 3, 2012 BIR RULING NO. 294-12 Sec. 32 (B) (7) (a) Tax Code; BIR Ruling No. 162-2011 Follosco Morallos & Herce Suite 2500, 25th Floor, 88 Corporate Center 141 Valero St., corner Sedeo St. Salcedo Village, Makati City Attention: Atty. Rachel P. Follosco Atty. Froilyn D. Pagayatan Gentlemen : This refers to your letter dated December 17, 2009 requesting on behalf of your client, Aureos Malaysia Fund, L.L.C. ("AMF or the Company"), confirmation of your opinion that any income derived by AMF from its investments in the Philippines such as interest on loans, interest on deposits, interest on bonds, dividends and capital gains on sale of shares of stock, bonds, and other domestic securities are exempt from Philippine income tax pursuant to Section 32 (B) (7) (a) of the National Internal Revenue Code of 1997 (Tax Code), as amended. As represented, AMF is a limited private company incorporated in the Republic of Mauritius on October 31, 2006 with registered office at Les Cascades Building, Edith Clavell Street, Port Louis, Republic of Mauritius. The purpose of the Company is to carry on the business of investment and in particular, but without limitation, to identify, research, negotiate, make, and monitor the progress of and sell, realize and exchange investments and distribute the proceeds of such investments, with the principal objective of providing investors with a high relative overall rate of return by means of both income and capital growth. The investors of AMF are (i) Commonwealth Development Corporation Group plc ("CDC"), (ii) Credit Guarantee Corporation Malaysia Berhad ("CGC"), and (iii) the Employee Provident Fund Board of Malaysia ("EPF Board"), hereinafter collectively referred to as the "Investors". AMF is 88.89% owned by two (2) financing institutions ( i.e. , CDC and CGC) owned and controlled by the British and Malaysian Governments, and 11.11% owned by a Malaysian government agency ( i.e. , EPF Board). TaDSHC CDC is a financing institution owned and controlled by the British Government established in 1948 by an act of the British Parliament in order to provide assistance to overseas countries, particularly to less developed countries, in the form of loans or to equity investments in local entities. CDC is financed almost entirely by the British Government and its activities form part of the Official Aid Programme of the British Government. CDC was likewise expressly recognized by the Philippine government as a financing institution owned and controlled by the United Kingdom of Great Britain government exempt from taxation pursuant to Section 28 (b) (8) (A) (ii) {now Section 32 (B) (7) (a)} of the Tax Code (Agreement between the government of the Republic of the Philippines and CDC dated September 3, 1997) . CGC is a financing institution majority-owned by Bank Negara Malaysia ( i.e. , the Malaysian Central Bank), which extends credit guarantees with the objective of facilitating and promoting the growth and development of small to medium enterprises (SMEs). The Malaysian Central Bank holds 76.4% of the issued share capital of CGC (Note 17, Page 53 of the Annual Report of CGC for the year ended 2008) . EPF Board is a Malaysian government agency. It is a statutory corporation established pursuant to the Employees Provident Fund Act 1991 of Malaysia ("EPF Act"), which provides for a scheme of savings for Malaysian employees' retirement and the management of the savings for the retirement purposes and for other matters. The EPF Act established the Employees Provident fund, which is held in trust by the EPF Board (Sections 24, and 25, EPF Act) . The members of the EPF Board are appointed by the Prime Minister of Malaysia (Section 4, EPF Act) . Pursuant to the Shareholders Agreement among the Investors dated 1 July 2007, each of the Investors shall subscribe to A Ordinary Shares of the Company up to the following maximum committed amounts: Name and Address Commitment US$ Commitment (No. of A Ordinary Shares to be subscribed) CDC Group plc 10,000,000 10,000,000 6 Duke Street St. James's London SWIY 6BN Credit Guarantee 10,000,000 10,000,000 Corporation Malaysia Berhad Level 13-16, Bangunan CGC 47301, Petaling Jaya Selangor Darul Ehsan Malaysia Employees Provident 5,000,000 5,000,000 Fund Board 16th Floor, KWSP Building Jalan Raja Laut 50350 Kuala Lumpur Malaysia The issue price of such A Ordinary Shares shall be paid by the Investors by way of capital contributions which will be called for by the Company from time to time. Such capital contributions shall be invested by AMF in private enterprises in Southeast Asian countries such as the Philippines. All proceeds and income received by AMF shall be distributed to the Investors in the form of dividend payments in proportion to their respective capital contributions. SECATH You now request for confirmation of your opinion that any income derived from investments of AMF in the Philippines such as interest on loans, interest on deposits, interest on bonds, dividends, and capital gains on sale of shares of stock, bonds, and other domestic securities, are exempt from Philippine income tax and withholding tax pursuant to Section 32 (B) (7) (a) of the Tax Code. In reply, please be informed that Section 32 (B) (7) (a) of the Tax Code provides that financing institutions owned, controlled, or enjoying refinancing from foreign governments are exempt from income tax, to wit: "(B) Exclusions from Gross Income The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (7) Miscellaneous Items. (a) Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments , and (iii) international or regional financial institutions established by foreign governments." Records show, however, that AMF is not a foreign government financing institution but a limited private company. Even though its investors are comprised of financing institutions of foreign governments and foreign government agency, it is not an institution contemplated under Section 32 (B) (7) (a) of the Tax Code. It must be noted that the foregoing provision requires that the income from investments in the Philippines, to be exempt from income tax, must be received by the financing institution owned, controlled, or enjoying refinancing from foreign governments. In this case, AMF is just an ordinary private company which happens to be managed and administered by financing institutions controlled by foreign governments. AMF is not, in itself, a financing institution owned, controlled, or enjoying refinancing from foreign governments. AMF is a mere investee company with respect to the financing institutions, CDC and CGC, and consequently, to the foreign governments. In view thereof, this Office is of the opinion, as it hereby holds, that any income which AMF derives from its investments in the Philippines such as interest on loans, interest on deposits, interest on bonds, dividends, and capital gains on sale of shares of stock, bonds, and other domestic securities, which is ultimately distributed to CDC, CGC and EPF Board in the form of dividends shall be subject to income tax. Please be guided accordingly. aEcSIH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue