DA ITAD BIR Ruling No. 051-09

April 30, 2009 DA ITAD BIR RULING NO. 051-09 Article 10 (Interest), Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty; BIR Ruling No. DA-ITAD 169-06 Romulo Mabanta Buenaventura Sayoc & De Los Angeles Attorneys at Law 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati Attention: Atty. Jayson L. Fernandez Gentlemen : This refers to your letter dated April 20, 2007 requesting confirmation that interest to be paid by Meridian (SPV-AMC) (Meridian) to Barclays Capital Finance Limited (Barclays) is subject to Philippine income tax at the rate of 15% of the gross amount thereof pursuant to Article 10 (Interest) of the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (Philippines-United Kingdom tax treaty). 1 HACaSc BASIC FACTS It is represented that Barclays is a corporation organized and existing under the laws of the United Kingdom, with address at 1 Churchill Place, London E14 5HP, England, United Kingdom; that Barclays, with Tax Reference No. 268/31610 01600, is a resident of the United Kingdom, as evidenced by a Certificate of Residence dated March 23, 2007 issued by the HM Revenue and Customs of the United Kingdom; that Barclays is not registered as a corporation or as a partnership in the Philippines, as evidenced by a Certificate of Non-Registration of Corporation/Partnership dated April 30, 2007 issued by the Securities and Exchange Commission; that, on the other hand, Meridian is a corporation organized and existing under the laws of the Philippines, with address at the 30th Floor, 8741 Citibank Tower, Paseo de Roxas, Makati City, Philippines; and that based on the Certificate of the Corporate Secretary of Meridian dated April 20, 2007, Barclays holds 124,995,000 common shares of Meridian, equivalent to PHP124,995,000.00, and which represents 99.99% ownership in Meridian. It is further represented that on December 11, 2006, Barclays and Meridian entered into an Inter-Company Loan Agreement (Agreement) whereby Barclays agreed to advance to Meridian a loan with a principal amounting to US$37,000,000 (the Loan ); that Meridian will repay the Loan in full to Barclays on the fifth anniversary of the date of drawdown, or such later date as the parties may agree; that Meridian will pay Barclays the Interest Amount 2 in respect of the Interest Period 3 ending on such Interest Payment Date, 4 and that any Interest Amount not paid when due shall be capitalized; that Meridian may make an early repayment of the whole or any part of the Loan provided that (a) it must give Barclays not less than one Business Day's prior notice of its intention to make such repayment, specifying the amount thereof and the date on which it is to be made (such notice to be ineffective if the winding up of Meridian commences before the date on which such notice expires), and (b) it will simultaneously pay all interests accrued to the date of repayment and any break costs in the event the date of payment is not an Interest Payment Date; that based on Certificate of Inward Remittance of Foreign Exchange dated January 3, 2007 issued by The Hongkong and Shanghai Banking Corporation Limited in Makati City, Philippines, the Loan was remitted to the account of Meridian on December 11, 2006; and that based on the notarized certification of the Corporate Secretary of Meridian dated April 20, 2007, the transaction involving Meridian and Barclays which is presently the subject of this ruling is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or judicial appeal. It is finally represented that you cite as basis for the confirmation of your request, BIR Ruling Nos. DA-ITAD 179-02 and 157-03, dated October 15, 2002, and October 17, 2003, respectively, the dispositive portions of which provide: BIR Ruling No. DA-ITAD 179-02 " Fortis, Paribas and Tokai Bank, all of which do not have permanent establishment in the Philippines to which the interest received and to be received from Maynilad Water could be attributed to, and considering further that Maynilad Water is a BOI-registered enterprise of a preferred pioneer status, this Office confirms your opinion as it hereby holds that the interest paid and to be paid by Maynilad Water to the remaining Bridge Loan lenders are subject to the following tax rates: a) Fortis Bank 10% of the gross amount of interest pursuant to the Protocol amending RP-Belgium tax treaty; b) Paribas 15% of the gross amount of interest pursuant to the RP-France tax treaty; and c) The Tokai Bank, Limited 10% of the gross amount of interest pursuant to the RP-Japan tax treaty ." BIR Ruling Nos. DA-ITAD 157-03 " Such being the case, this Office confirms your opinion and so holds that the interest payments by PIC to PIG Ltd. under the aforementioned Loan Agreement are subject to 15% tax based on the gross amount of the interest pursuant to Article 10 of the RP-UK tax treaty ." cADaIH RULING A. On income tax In reply, please be informed that paragraphs 1, 2, 3 and 4 of Article 10 of the Philippines-United Kingdom tax treaty quoted below provide for the taxation of interest arising in the Philippines and derived by a resident of the United Kingdom, thus: " Article 10 Interest 1. Interest arising in a Contracting State which is derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State . 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest . 3. Notwithstanding the provisions of paragraph 2 of this Article, the tax charged in the Contracting State in which the interest arises shall not exceed 10 per cent of the gross amount of the interest if the interest is paid by a company in respect of the public issue of bonds, debentures or similar obligations . SITCcE 4. Notwithstanding the provisions of paragraphs 2 and 3 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived and beneficially owned by : a) the Government of the other Contracting State, a political subdivision or local authority thereof or an instrumentality of that other State; or b) a resident of the other Contracting State in respect of a loan made, guaranteed or insured by such instrumentality of that other State as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. The term 'instrumentality' as used in this paragraph means any agency or entity created or organised by either Contracting Government in order to carry out governmental functions ." ICTcDA According to the above paragraphs, such interest is subject to Philippine income tax at a rate not to exceed (a) 10% of the gross amount of the interest if the interest is paid by a company in respect of public issue of bonds, debentures or similar obligations, or (b) 15% of the gross amount of the interest in all other cases. However, the interest is exempt from tax if it is derived and beneficially owned by (a) the Government, a political subdivision or a local authority of the United Kingdom, or (b) a resident of the United Kingdom in respect of a loan made, guaranteed or insured by an instrumentality of United Kingdom as is specified and agreed in letters exchanged between the competent authorities of the United Kingdom and the Philippines. Accordingly, the interest to be paid by Meridian to Barclays pursuant to the Inter-Company Loan Agreement, being one which is not paid in respect of public issue of bonds, debentures or similar obligations, nor derived and beneficially owned by the Government, a political subdivision or a local authority of the United Kingdom, or by a resident of the United Kingdom in respect of a loan made, guaranteed or insured by an instrumentality of United Kingdom, is subject to Philippine income tax at a rate of 15% of the gross amount thereof. (BIR Ruling No. DA-ITAD 169-06 dated December 22, 2006) B. On documentary stamp tax Finally, pursuant to Section 179 of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9243, 5 the Inter-Company Loan Agreement between Barclays and Meridian is subject to documentary stamp tax, thus: "SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of the contract is located or is used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation ." (BIR Ruling No. DA-ITAD 169-06 dated December 22, 2006) TSAHIa This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Signed on June 10, 1976, and effective January 1, 1979. 2. Interest Amount in respect of an Interest Period means the amount of interest payable in respect of such Interest Period calculated by applying the Rate of Interest for such Interest Period to the average amount (calculated on a daily basis) of the Loan (together with any interest due but unpaid) outstanding during such Interest Period and multiplying the resulting sum by a fraction of which the numerator is equal to the actual number of days in the Interest Period concerned and the denominator is equal to 360. Rate of Interest in respect of an Interest Period means the rate per annum (expressed as a percentage per annum) equivalent to Barclays Bank PLC's offer rate to leading banks in the London interbank market for such U.S. Dollar deposits for a period equal or comparable to such Interest Period, or such other rate representing Barclays' cost of funding as Barclays and Meridian may agree from to time, provided such amount does not exceed the rate equal to 0.50% plus the London interbank market offer rate for U.S. Dollar deposits for the relevant period (according to the relevant BBA Interest Settlement Rate displayed on Bloomberg BBAM at the relevant time). 3. Interest Period means a period of 1, 3 or 6 months (or such other period as Barclays and Meridian may agree from time to time) as selected by Meridian and notified to Barclays prior to the commencement of the relevant period provided that: (a) the initial Interest Period in respect of the Loan will commence on the day that funds are paid to Meridian under Clause 2 (b) and end on the last day of the selected period for that Interest Period; (b) each subsequent Interest Period will commence on the last day of the preceding Interest Period and end on the last day of the selected period for that Interest Period; and (c) if Meridian fails to notify Barclays of its selection, the Interest Period will be one month. 4. Interest Payment Date means the last day on an Interest Period. 5. Entitled An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes, which was signed into law on February 17, 2004, and became effective on March 20, 2004.