San Miguel Aerocity, Inc. Argonbay Construction Company, Inc.

December 28, 2022 BIR RULING NO. OT-443-2022 Republic Act No. 11506; BIR Ruling No. OT-324-2021 San Miguel Aerocity, Inc. Argonbay Construction Company, Inc. No. 40 San Miguel Avenue Mandaluyong City, Metro Manila Philippines Attention: AAA Authorized Signatory, Argonbay Construction Company, Inc. BBB Authorized Signatory, San Miguel Aerocity, Inc. Gentlemen : This refers to your request on behalf of San Miguel Aerocity, Inc. ("SMAI") and Argonbay Construction Company, Inc. ("ACCI") for confirmation that: 1. SMAI may validly sell, transfer or assign its rights and privileges set forth in Section 16 (Tax Exemptions) of Republic Act ("RA") No. 11506 entitled "An Act Granting San Miguel Aerocity, Inc. a Franchise to Construct, Develop, Establish, Operate, and Maintain a Domestic and International Airport in the Municipality of Bulakan, Province of Bulacan, and to Construct, Develop, Establish, Operate, and Maintain an Adjacent Airport City" in favor of ACCI (SMAI's affiliate) relative to the construction, acquisition, ownership, leasing, operation, development or management of the Airport City, without the need for prior approval of Congress pursuant to Section 14 thereof; and 2. ACCI's importation of one (1) unit Trailing Suction Hopper Dredger "Alexander Von Humboldt" (the "Vessel" ), and other subsequent importations relative to the construction of the Airport City is exempt from applicable taxes under the National Internal Revenue Code of 1997, as amended ("Tax Code") . Background: ACCI is a domestic corporation that is wholly-owned by San Miguel Holdings Corp. ("SMHC") , 1 which in turn is wholly-owned by San Miguel Corporation ("SMC") . 2 On the other hand, San Miguel Aerocity, Inc. ("SMAI") is 72.67% owned by SMHC and 27.33% by SMC. 3 Hence, SMC is the ultimate parent of ACCI and SMAI. On December 20, 2020, SMAI was granted a franchise ("Franchise") to construct, develop, establish, operate, and maintain a domestic and international airport in the Municipality of Bulakan, Province of Bulacan (the "Airport" ), and to construct and develop, establish, operate and maintain the areas adjacent to the Airport into one integral and comprehensive development (the "Airport City" ) under RA No. 11506 (collectively, the "Project" ). On August 22, 2022, SMAI assigned to ACCI all its rights and privileges under the Franchise, including the tax and duty exemptions, relative to the implementation of Navotas Coastal Bay Reclamation and Onshore Land Development Project within the territorial and geographical jurisdictions of the City of Navotas, Metro Manila, and the Municipalities of Obando and Bulakan, Province of Bulacan (the "Navotas Project" ), which is a part of the evolving Airport City development. 4 On May 31, 2022, ACCI and European Dredging Company S.A. entered into a BIMCO Standard Bareboat Charter covering the charter and deployment to the Philippines of the Vessel for a period of twenty-two (22) weeks from August 16, 2022. The Vessel will be used in the reclamation and land development requirements of the Navotas Project. At the end of the charter period, the Vessel shall be demobilized and exported out of the Philippines. A special permit was issued by the Maritime Industry Authority relating to the said importation. In reply, please be informed that Section 16 of RA No. 11506 provides that SMAI, its successors and assignees, during the ten-year construction period, shall be exempt from any and all direct and indirect taxes and fees of any kind relating to the construction, development, establishment and operation of the Project, including customs duties and tariffs on its importations, if any, to wit : "SEC. 16. Tax Exemptions. During the ten-year construction period, the grantee, its successors or assignees, shall be exempt from any and all direct and indirect taxes and fees of any kind, nature or description, which emanate exclusively from the construction, development, establishment, and operation of the airport and Airport City, including income taxes, value-added taxes, percentage taxes, excise taxes, documentary stamp taxes, customs duties and tariffs , taxes on real estate, buildings and personal property, business taxes, franchise taxes, supervision fees, and permit fees levied, established or collected, or may be levied, established or collected, by any city, municipal, provincial or national authority." (Underscoring supplied) The above tax exemptions, which emanate from a special law, were confirmed by the Bureau in BIR Ruling No. OT-324-2021 5 which was circularized by the Bureau of Customs through Customs Memorandum Circular No. 197-2021. 6 In the said BIR Ruling, this Office has discussed in detail the tax exemptions of SMAI and its successors and assignees during the ten-year construction period: "I. DURING THE TEN-YEAR CONSTRUCTION PERIOD During the Ten-Year Construction Period, which starts on 15 January 2021 (effective date of the Aerocity Franchise) and ends on 14 January 2031, SMAI shall be exempt from any and all direct and indirect taxes, duties, tariffs and fees of any kind, nature and description , which emanate exclusively from the construction, development, establishment, and operation of the Airport and Airport City, including income tax, value-added tax, percentage tax, excise tax and documentary stamp tax. xxx xxx xxx G. All other internal revenue taxes As provided under Section 16 of the Aerocity Franchise, SMAI shall be exempt from any and all direct and indirect taxes levied, established or collected, or may be levied, established or collected, by any city, municipal, provincial or national authority. Accordingly, SMAI is not subject to any other internal revenue taxes, which emanate exclusively from the construction, development, establishment, and operation of the Airport and Airport City. xxx xxx xxx This Ruling shall serve as a Certification or confirmation of the tax exemptions of SMAI, its successors and assignees , as provided under RA No. 11506 or the Aerocity Franchise which took effect on January 15, 2021." (Underscoring supplied) Under Section 14 of RA No. 11506, SMAI has been granted the right to sell, transfer or assign its rights and privileges under the Franchise, including the tax exemptions under Section 16 of the same, in favor of its affiliate without the need of a prior approval of the Congress of the Philippines, to wit : "SEC. 14. Sale, Lease, Transfer, Grant of Usufruct, or Assignment of Franchise. The grantee , its successors or assignees shall not sell, lease, transfer, grant the usufruct of, nor assign the Franchise or the rights and privileges acquired thereunder to any person, firm, company, corporation or other commercial or legal entity, nor merge with any other corporation or entity, nor the controlling interest of the grantee, its successors or assignees, be transferred, simultaneously or contemporaneously, to any person, firm, company, corporation, or entity without the prior approval of the Congress of the Philippines . . . Provided, That the limitations set forth in this section shall not apply to: . . . (e) any sale, transfer or assignment by the grantee, its successors or assignees, in favor of an affiliate whose controlling interest is owned by the same parent corporation of the rights and privileges set forth in this section and in Sections 1, 6, 8, 15, 16, and 17 relative to the construction, acquisition, ownership, leasing, operation, development, or management of the Airport City: Provided, finally, That any such transfer, sale or issuance is in accordance with any applicable constitutional limitations." (Emphases and underscoring supplied) As clarified in BIR Ruling No. OT-324-2021, the term "affiliate" refers to any entity whose "controlling interest is owned" by SMC, being SMAI's parent corporation. In the same BIR Ruling, the Bureau mentioned that the term "affiliate" pertains to a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or under the common control of another corporation, which thereby becomes its parent corporation. 7 "Control" exists in favor of a parent corporation when it has the power to direct or govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. 8 It is presumed to exist when the parent corporation owns, directly or indirectly, through subsidiaries, more than one half (1/2) of the voting power of an enterprise, unless, in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control. 9 This concept of "control" is also being used by the Bureau to determine whether a transaction qualifies as a tax-free exchange under Section 40 (C) (2) of the Tax Code which states that "control" refers to ownership of stocks in a corporation after the transfer of property possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. 10 Based on the above disquisitions, it can be deduced that entities may be considered as affiliates if both of them are under the control of another corporation, which is the parent corporation, and said parent corporation exercises control if it owns, directly or indirectly, more than one half (1/2) of the voting power of said corporations. Applied in this case, considering that ACCI is wholly-owned by SMHC, which in turn is wholly-owned by SMC, and considering further that SMAI is 72.67% owned by SMHC and 27.33% by SMC, it is clear that ACCI and SMAI are affiliates since they are both under the control (100%) of SMC, which is their ultimate parent corporation. Accordingly, this Office hereby confirms that SMAI may validly sell, transfer or assign to ACCI all its rights and privileges relative to the land development components for the Airport City relating to the Navotas Project, including, for the avoidance of doubt, the tax and duty exemptions without need for prior approval of the Congress. Such being the case, the importation by ACCI (being the assignee of the rights and privileges of SMAI under the Franchise) of the Vessel that will be used for the Navotas Project is exempt from Philippine taxes, customs duties and tariffs, and other fees that may be levied, established or collected, by any city, municipal, provincial or national authority. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) ROMEO D. LUMAGUI, JR. Commissioner of Internal Revenue Footnotes 1. Per General Information Sheet of Argonbay Construction Company, Inc. for the year 2022. 2. Per General Information Sheet of San Miguel Holdings Corp. for the year 2022. 3. Per General Information Sheet of San Miguel Aerocity, Inc. for the year 2022. 4. Per Deed of Assignment between San Miguel Aerocity, Inc. and Argonbay Construction Company, Inc. dated August 22, 2022. 5. August 26, 2021. 6. Republic Act (RA) No. 11506 and Bureau of Internal Revenue (BIR) Ruling No. OT-324-2021, September 22, 2021. 7. Section 3 (b) of RA No. 9856, An Act Providing the Legal Framework for Real Estate Investment Trust and for Other Purposes, July 27, 2009; SEC Memorandum Circular No. 1-2020, Revised Implementing Rules and Regulations of Republic Act No. 9856, Otherwise Known as the Real Estate Investment Trust (REIT) Act of 2009, January 20, 2020. 8. Section k, Rule 3 of SEC Memorandum Circular No. 1-2020; Section 3, Item 4 of Revenue Regulations No. 19-2020, July 8, 2020. 9. Id. 10. Section 11 of Revenue Memorandum Circular ("RMC") No. 19-2022, Providing Clarification and Guidance on Section 8 of Revenue Regulations (RR) No. 5-2021 on the Tax-Free Exchanges of Properties under Section 40 (C) (2) of the National Internal Revenue Code (Tax Code), as Amended by Republic Act (RA) No. 11534 or the CREATE, February 4, 2022.