DA ITAD BIR Ruling No. 070-07

May 31, 2007 DA ITAD BIR RULING NO. 070-07 Article 11, Philippines-Japan tax treaty; Sections 23 (F) and 42 (A) (1), National Internal Revenue Code of 1997 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated May 23, 2007, requesting confirmation of the following: 1. That interests to be paid by CrimsonPower Holdings Company Inc. (CrimsonPower) to the Japan Bank for International Cooperation (JBIC) are exempt from Philippine income tax pursuant to Article 11 of the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Japan tax treaty) ; 1 2. That interests to be paid by CrimsonPower to Mizuho Corporate Bank (Mizuho Bank) and Sumitomo Mitsui Banking Corporation (Sumitomo Bank) on loans to be guaranteed by JBIC are exempt from Philippine income tax pursuant to Article 11 of the Philippines-Japan tax treaty; and 3. That interests to be paid by Mizuho Bank and Sumitomo Bank to Australia and New Zealand Banking Group Limited, Tokyo Branch (ANZ Japan Branch), ING Bank, N.V., Tokyo Branch (ING Japan Branch) and Calyon Tokyo Branch (Calyon Japan Branch) are exempt from Philippine income tax pursuant to Sections 23 (F) and 42 (C) (1) of the National Internal Revenue Code of 1997 (Tax Code). BACKGROUND It is represented that CrimsonPower is a corporation organized and existing under the laws of the Philippines and registered with the Securities and Exchange Commission under Company Registration No. CS200619721; that its principal stockholders are Tokyo Electric Power Company International B.V. and Marubeni Corporation , being foreign corporations that won the bid for the acquisition of the power generation interests in the Philippines owned by the subsidiaries of Mirant Corporation ; that CrimsonPower was established to acquire Mirant Asia Pacific Limited (Mirant Asia) , a Bermuda exempt company with limited liability with registered number 18241 2 and is a subsidiary of Mirant Corporation which owned the power generation interests in the Philippines; that to finance the acquisition of Mirant Asia , CrimsonPower will be obtaining a loan from JBIC and from Mizuho Bank and Sumitomo Bank ; that JBIC is an entity wholly-owned by the Japanese government, while Mizuho Bank and Sumitomo Bank are foreign corporations organized and existing under the laws of Japan, with addresses at 3-3 Marunouchi 1-chome, Chiyoda-ku, Tokyo, Japan and at 1-2 Yurakucho 1-chome Chiyoda-ku, Tokyo, Japan, respectively; and that based on the Certificates of Non-Registration of Corporation/Partnership dated May 18, 2007, issued by the Securities and Exchange Commission, a name similar to Mizuho Bank is registered under the name Mizuho Corporate Bank Ltd., Manila Branch under Company Registration No. AF95000069, and a name similar to Sumitomo Bank is registered under the name Sumitomo Mitsui Banking Corporation, Manila Representative Office under Company Registration No. AF95000032. It is further represented that CrimsonPower will be obtaining the loan twenty-one (21) days before it completed the acquisition of the shares and assets of Mirant Asia ; 3 and that the total amount of the loan is UD$2,700,000,000.00 (US$2.7 Billion), 60% or US$1.62 Billion of which is by way of a direct loan (Facility A) from JBIC and the other 40% or US$1.08 Billion by way of a direct loan (Facility B) from Mizuho Bank and Sumitomo Bank. 4 TSEHcA It is further represented that JBIC will be providing guarantee in favor of Mizuho Bank and Sumitomo Bank . JBIC, at all times during the guaranty period, will be guaranteeing 100% repayment installment of the principal of the facility loan and 100% payment of the ordinary interest on the principal accrued at commercial interest rate, which become due and demandable on the scheduled dates mentioned in the Senior Loan Agreement. It is further represented that Mizuho Bank and Sumitomo Bank will be entering into a Funded Participation Agreement with ANZ Japan Branch , ING Japan Branch and Calyon Japan Branch whereby the latter, proportionate to its participation, will be paying Mizuho Ban k and Sumitomo Bank on a particular settlement date or dates in order for Mizuho Bank and Sumitomo Bank to fund the loan to be extended to CrimsonPower ; that while CrimsonPower will be named the beneficiary of the loan, it is neither a party to the Participation Agreement nor is it privy to any contractual rights and obligations existing between Mizuho Bank and Sumitomo Bank and ANZ Japan Branch , ING Japan Branch and Calyon Japan Branch ; that ANZ Japan Branch , ING Japan Branch and Calyon Japan Branch are branches of foreign corporations organized and existing under the laws of Australia, The Netherlands and France, respectively, and their addresses are at Level 6, 100 Queen Street, Melbourne, Australia, for ANZ Japan Branch , at Amstelveenseweg 500 1081 KL Amsterdam, The Netherlands for ING Japan Branch , and at 9, quai du President Paul Doumer 92920 Paris La Defense Cedex, France, for Calyon Japan Branch ; and that based on the Certificates of Non-Registration of Corporation/Partnership dated May 18, 2007, issued by the Securities and Exchange Commission, a name similar to ANZ Japan Branch is registered under the name Australia and New Zealand Banking Group Limited under Company Registration No. F-1332, and a name similar to ING Japan Branch is registered under the name ING Bank N.V. under Company Registration No. F-1324, while a name similar to Calyon Japan Branch does not appear to be registered at all. RULING 1. On whether the interests to be paid by CrimsonPower to JBIC are exempt from Philippine income tax . On the taxation of interest arising in the Philippines and derived by a resident of Japan, paragraphs 1, 2 3 and 4, Article 11 of the Philippines-Japan tax treaty provides as follows: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. 4. Notwithstanding the provisions of paragraphs 2 and 3, interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term "financial institution wholly owned by the Government" means: a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; b) In the case of the Philippines, the Development Bank of the Philippines; and c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States." According to the above paragraphs, interest arising in the Philippines and derived by a resident of Japan is subject to Philippine income tax at the rate of (a) 10% of the gross amount of the interest if the interest is paid in respect of government securities, or bonds or debentures, or if the interest is paid by a domestic company in the Philippines registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, or (b) 15% of the gross amount of the interest in all other cases. However such interest is exempt from Philippine income tax if the interest is derived by or paid to the Government of Japan, the political subdivisions and local authorities of Japan, the Central Bank of Japan, or any financial institution wholly owned by the Government of Japan, or if the interest is derived by or paid to a resident of Japan with respect to debt-claims guaranteed or indirectly financed by the Government of Japan, the political subdivisions and local authorities of Japan, the Central Bank of Japan, or any financial institution wholly owned by the Government of Japan. The term financial institution wholly owned by the Government of Japan includes the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency, and any such financial institution the capital of which is wholly owned by the Government of Japan, which may be agreed from time to time between the Governments of Japan and the Philippines. In BIR Ruling No. DA-ITAD 21-99 dated August 24, 1999, this Bureau ruled and considered that JBIC was also a financial institution wholly owned by the Government of Japan, which can enjoy exemption from interest arising in the Philippines. Considering that the Facility A of the loan amounting to US$1.62 Billion will be extended directly to CrimsonPower by JBIC and considering that JBIC is a financial institution wholly owned by the Government of Japan, pursuant to paragraph 4, Article 11 of the Philippines-Japan tax treaty, the interests to be paid by CrimsonPower to JBIC for such loan are therefore exempt from Philippine income tax. (BIR Ruling Nos. DA-ITAD 104-06 dated August 30, 2006, DA-ITAD 58-06 dated May 31, 2006, and DA-ITAD 21-99 dated August 24, 1999.) 2. On whether the interests to be paid by CrimsonPower to Mizuho Bank and Sumitomo Bank on the loan that will be guaranteed by JBIC are exempt from Philippine income tax . As previously stated, JBIC will be providing guarantee in favor of Mizuho Bank and Sumitomo Bank so that JBIC, at all times during the guaranty period, will be guaranteeing 100% repayment installment of the principal of the facility loan and 100% payment of the ordinary interest on the principal accrued at commercial interest rate, which become due and demandable on the scheduled dates mentioned in the Senior Loan Agreement. EcTDCI In connection with such guarantee, paragraph 4, Article 11 of the Philippines-Japan treaty provides also that interest arising in the Philippines and derived by a resident of Japan is exempt from Philippine income tax if such interest arises from debt-claims guaranteed or indirectly financed by the Government of Japan, the political subdivisions and local authorities of Japan, the Central Bank of Japan, or any financial institution wholly owned by the Government of Japan like JBIC. Considering that the Facility B of the loan amounting to US$1.08 Billion will be extended directly to CrimsonPower by Mizuho Bank and Sumitomo Bank and considering that such loan will be guaranteed by JBIC, a financial institution wholly owned by the Government of Japan, particularly, 100% repayment installment of the principal and 100% payment of the ordinary interest on the principal, pursuant to paragraph 4, Article 11 of the Philippines-Japan tax treaty, the interests to be paid by CrimsonPower to Mizuho Bank and Sumitomo Bank for such loan are therefore exempt from Philippine income tax. (BIR Ruling Nos. DA-ITAD 104-06 dated August 30, 2006) With respect to the guarantee, we are of the opinion that if JBIC does not guarantee fully the payment of the principals and the interests to be paid to Mizuho Bank and Sumitomo Bank , the interest to be paid by CrimsonPower to these commercial banks cannot enjoy the exemption provided in paragraph 4, Article 11 of the Philippines-Japan tax treaty. In such a situation, the interests to be paid by CrimsonPower to Mizuho Bank and Sumitomo Bank are otherwise subject to Philippine income tax at the rate of 15% of the gross amount thereof, pursuant to paragraph 2 (b), Article 11 of the tax treaty, or even subject to a different tax treatment considering that Mizuho Bank and Sumitomo Bank are registered with the Securities and Exchange Commission which might be considered already as having permanent establishments in the Philippines. This is confirmed in paragraph 6, Article 11 of the tax treaty, thus: "6. The provisions of paragraphs 1, 2 and 3 above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." 3. On whether the interests to be paid by Mizuho Bank and Sumitomo Bank to ANZ Japan Branch, ING Japan Branch and Calyon Japan Branch are exempt from Philippine income tax . As represented, under the Funded Participation Agreement, Mizuho Bank and Sumitomo Bank will be getting the fund for the Facility B of the loan to be extended to CrimsonPower from ANZ Japan Branch , ING Japan Branch and Calyon Japan Branch , which are branches of foreign corporations organized and existing under the laws of Australia, the Netherlands and France, respectively. Accordingly, on the interests to be paid by Mizuho Bank and Sumitomo Bank to ANZ Japan Branch , ING Japan Branch and Calyon Japan Branch , which may or may not be equal to the amount of interests originally paid by CrimsonPower, pursuant to Section 42 (A) (1) of the Tax Code, such interests are not considered derived from sources within the Philippines because the obligations to pay such interests are NOT upon persons ( ANZ Japan Branch, ING Japan Branch and Calyon Japan Branch ) residents of the Philippines. 5 Further, under Section 23 (F) of the Tax Code, a foreign corporation like ANZ Japan Branch, ING Japan Branch and Calyon Japan Branch , whether or not engaged in trade or business in the Philippines, is taxable only with respect to income derived from sources within the Philippines, thus: "SEC. 23. General Principles of Income Taxation in the Philippines . Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." EATCcI This ruling is issued on the basis of the facts as represented and shall be applicable only to the foregoing when such representations are supported by relevant documents consistent thereto. 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, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue Footnotes 1. Signed on February 13, 1980, and became effective on January 1, 1981. 2. See definition of Target in the Senior Loan Agreement. 3. See definition of Acquisition, Closing and Closing Date in the Senior Loan Agreement. 4. See Section 2.1 (The Facilities) and Schedule 1 (Part 2) of the Senior Loan Agreement. 5. The term resident for this purpose may include a domestic corporation and even a resident foreign corporation.