DA ITAD BIR Ruling No. 066-08

October 2, 2008 DA ITAD BIR RULING NO. 066-08 Article 11 of the Philippines-Sweden tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: W. U. Villanueva Principal, Tax Service Gentlemen/Ladies : This refers to your letter dated 6 October 2006 which was filed on behalf of MIRANT SWEDEN INTERNATIONAL AB (PUBL) (Mirant-Sweden), requesting confirmation of your opinion that the interest payments by Mirant Sual Corporation (MSC) and Mirant Pagbilao Corporation (MPC) to Mirant-Sweden are subject to the preferential tax rate of ten percent (10%), pursuant to Article 11 of the Philippines-Sweden tax treaty. 1 cDCEHa It is represented that Mirant-Sweden is a foreign corporation organized and existing under the laws of Sweden, with address at Box 7305, 103 90 Stockholm, Sweden as evidenced by a Certificate of Registration issued by the Swedish Companies Registration Office on 20 September 2006; that it is a public limited liability company; that it is not registered as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated 14 September 2006; that MSC and MPC are corporations duly organized and existing under the laws of the Philippines, with principal address at Bo. Pangascasan, Sual Pangasinan, Philippines, and Pagbilao Grande Island, Pagbilao, Quezon, Philippines, respectively. It is further represented that on 15 August 2006, MSC and MPC separately executed two (2) Intercompany Notes in favor of Mirant-Sweden with the principal amounts of Four Hundred Million US Dollars (US$400,000,000) and Three Hundred Million US Dollars (US$300,000,000), respectively; that the unpaid principal amounts from time to time outstanding shall bear interest for each day during each "Interest Period" in effect under their Credit Agreement at a rate per annum equal to the Eurodollar Rate determined for such day plus 2.75%, or at such rate per annum as shall be agreed upon from time to time by payors, MSC and MPC, and the payee, Mirant-Sweden; that interest shall be due and payable on the 13th day of each month commencing after the date hereof or at such other times as may be agreed upon in writing from time to time by the said payors and payee; that MSC and MPC will pay the first monthly interest payment to Mirant-Sweden on 13 September 2006 and every quarter thereafter until the loan is fully paid; and that the transaction subject of the instant request for ruling is not under investigation, audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of MSC, MPC and Mirant-Sweden. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337, provides as follows, viz. : "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests . . . : Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). SaITHC xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. (a) Interest on Foreign Loans. A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986; xxx xxx xxx" (Emphasis supplied) However, Section 32 (B) (5) of the same Code provides as follows, to wit: "SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title : 2 xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. " In this particular case, you invoke the provisions of the Philippines-Sweden tax treaty which, in its Article 11, provides as follows, viz. : "ARTICLE 11 Interest 1. Interest arising in a Contracting State and paid to 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 laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. DcITaC xxx xxx xxx 4. The term 'interest' as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits and in particular, income from government securities and bonds or debentures including premiums and prices attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. xxx xxx xxx" Based on the aforequoted provisions, your opinion that the interest payments by MSC and MPC to Mirant-Sweden are subject to 10% preferential tax rate as prescribed under Article 11 of the Philippines-Sweden tax treaty is hereby confirmed. Moreover, the subject Intercompany Notes are subject to the documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9243, 3 at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof of the issue price of the said promissory notes. This ruling is issued on the basis of the foregoing facts as represented. If upon investigation it shall be disclosed that the actual facts are different, this ruling shall be without force and effect insofar as the herein parties are concerned. AcCTaD Very truly yours, (SGD.) LILIAN B. HEFTI Commissioner of Internal Revenue Footnotes 1. Formally known as THE CONVENTION BETWEEN THE REPUBLIC OF THE PHILIPPINES AND THE KINGDOM OF SWEDEN FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME. 2. TITLE II TAX ON INCOME. 3. Republic Act No. 9243 An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as amended and for other purposes. (Effective date is 20 March 2004 per Revenue Regulations No. 13-2004).