DA ITAD BIR Ruling No. 074-08

October 29, 2008 DA ITAD BIR RULING NO. 074-08 Article 11 (Interest); Philippines-Netherlands tax treaty; BIR Ruling No. DA-ITAD 130-06 Puyat Jacinto & Santos Law Office 12th Floor, Manilabank Building 6772 Ayala Avenue, Makati City Attention: Atty. Virginia B. Viray Atty. Christian Gold M. Calibo Gentlemen : This refers to your letter dated September 14, 2007, requesting confirmation that interest to be paid by Asia Special Situations M3P2 (SPV-AMC), Inc. (Asia M3P2) to Asia Special Situations M3P1 B.V. (Asia M3P1) is subject to income tax at the rate of 15 percent based on the gross amount thereof, pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Netherlands tax treaty). 1 BASIC FACTS It is represented that Asia M3P1 is a corporation organized and existing under the laws of the Netherlands, as evidenced by its Articles of Association; that the objectives of Asia M3P1 are (a) to incorporate other enterprises and legal entities, and to conduct and participate in the management of, and to render services to, and finance such enterprises and entities; (b) to provide security and guaranty for debts incurred by the affiliates of Asia M3P1, and to provide guarantee for the performance of the other obligations of such affiliates; (c) to acquire, administer, develop, and dispose real estate and movable properties and related rights and other rights over such assets; and (d) to perform other acts connected with or conducive to the foregoing; that Asia M3P1 is situated at Saturnusstraat 25 i, 2132 HB Hoofddorp, Amsterdam, the Netherlands, and is registered with the Chamber of Commerce and Industries of the Netherlands under Registration No. 34267548; that Asia M3P1 is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership dated September 10, 2007, issued by the Securities and Exchange Commission; that, on the other hand, Asia M3P2 is a corporation organized and existing under the laws of the Philippines and registered with the Securities and Exchange Commission under Registration No. CS200707564; and that Asia M3P1 owns 40 percent of the shares of stock of Asia M3P2, based on the notarized Certification dated September 12, 2007, issued by the Assistant Corporate Secretary of Asia M3P2. The Asset Sale and Purchase Agreement It is further represented that on April 20, 2007, United Coconut Planters Bank (UCPB) (a corporation organized and existing under the laws of the Philippines, situated at UCPB Building, Makati Avenue, Makati City, Philippines) and Asia Debt Management Hong Kong Limited (Asia Debt Management) (a corporation organized and existing under the laws of Hong Kong, situated at 1008 ICBC Tower, 3 Garden Road, Central, Hong Kong) entered into an Asset Sale and Purchase Agreement for the purchase by Asia Debt Management of certain properties held by UCPB in the Philippines; that the properties in question are the 82 condominium units, the 189 appurtenant parking slots, and the 212 employee/excess parking slots at the Forbes Tower of Fraser Place in Valero Street, Salcedo Village, Makati City, Philippines (the Properties ), with a total land area of 27,885.65 square meters and with a purchase price of PHP1,057,299,000.00; and that the purchase price will be paid in accordance with the following schedule: STHAaD 1. Initial payment of PHP211,459,800.00 on the effective date of the Agreement on April 20, 2007. 2. Another payment of PHP424,229,865.00 on the first closing date of the Agreement on or before May 31, 2007. 3. Final payment of PHP421,609,335.00 on the final closing date of the Agreement on or before December 5, 2007. It is further represented that Asia Debt Management may, with the prior written consent of UCPB, transfer or assign all of its rights and obligations under the Asset and Sale Purchase Agreement to another entity that qualifies as a Special Purpose Vehicle under Republic Act No. 9182 (An Act Granting Tax Exemption and Fee Privileges to Special Purpose Vehicles which Acquire or Invest in Non-Performing Assets, Setting the Regulatory Framework, and for Other Purposes) 2 or the Special Purpose Vehicle (SPV) Act of 2002, as amended by Republic Act No. 9343 n (An Act Amending Republic Act No. 9182, Otherwise Known as Special Purpose Vehicle Act of 2002 for the Purpose of Allowing the Establishment and Registration of New SPVs and for Other Purposes); 3 that such entity will be an affiliate of Asia Debt Management and must be organized in accordance with Republic Act No. 9182 4 and its Implementing Rules and Regulations for the purpose of acquiring title to the Properties; and that Asia Debt Management will effect the transfer or assignment by executing an Accession Agreement with that entity on or before the first closing date of the Asset and Sale Purchase Agreement on May 31, 2007. CSaITD It is further represented that 27,885.65 square meters of the total land area of the Properties, amounting to PHP1,024,374,227.00, can be covered by the benefits under Republic Act No. 9182. The Accession Agreement It is further represented that on May 30, 2007, Asia Debt Management, with the consent and participation of UCPB, subsequently entered into an Accession Agreement with Asia M3P2 (a domestic corporation described above) wherein Asia M3P2 agreed to become a party to the Asset Sale and Purchase Agreement between UCPB and Asia Debt Management and to perform and comply with all the obligations of Asia Debt Management with respect to the purchase of the Properties. The Omnibus Notes Facility Agreement It is further represented that on June 1, 2007, Asia M3P2 and Asia M3P1 (a foreign corporation described above) entered into an Omnibus Notes Facility Agreement wherein Asia M3P1 agreed to provide funds to Asia M3P2 to purchase in part the Properties contemplated in the Asset Sale and Purchase Agreement; that Asia M3P1 will provide Asia M3P2 a facility of up to US$11,046,853.22 and Asia M3P2 may avail of this facility by issuing a notice of availment to Asia M3P1 indicating therein the amount that Asia M3P2 intends to utilize as part of the facility, and that, upon receipt of the amount requested, Asia M3P2 will issue the corresponding note to Asia M3P1; and that Asia M3P2 will issue the following Notes to Asia M3P1: 1. Note 1a US$4,443,366.25, for the initial payment of the Properties amounting to PHP211,459,800.00 on April 20, 2007. Based on the supplemental letter of Puyat Jacinto and Santos Law Office dated June 30, 2008, a Notice of Availment for the amount indicated in Note 1a was not issued by Asia M3P2 to Asia M3P1 because the amount was remitted before the execution of the Omnibus Notes Facility Agreement on June 1, 2007. STaCIA Based on the Certificate of Inward Remittance of UCPB (Branch No. 470) dated May 3, 2007, an amount of US$4,443,366.25 (PHP211,459,799.83 at an exchange rate of PHP47.59 to US$1.00) was remitted by Asia Debt Management to the account UCPB on April 20, 2007. Subsequently, Asia M3P2 issued Note 1a dated June 1, 2007, to Asia M3P2 promising the latter to pay the amount of US$4,443,366.25, subject to the terms and conditions of the Omnibus Notes Facility Agreement. 2. Note 1b US$35,675.11, for the payment of transaction fees and expenses relating to Note 1a. Based on the same supplemental letter, a Notice of Availment for the amount indicated in Note 1b was not issued by Asia M3P2 to Asia M3P1 because the amount was remitted before the execution of the Omnibus Notes Facility Agreement on June 1, 2007. Based on the Certification of Manilabank (Ayala Avenue, Makati City Branch) dated February 5, 2008, an amount of US$115,179.60 was remitted to the account of Puyat Jacinto and Santos Law Office on that date. Based on the Certification of Puyat Jacinto and Santos Law Office dated June 27, 2008, of the amount remitted, US$35,465.21 (PHP1,668,283.58) will be held in trust by Puyat Jacinto and Santos Law Office for the account of Asia M3P2, which represented the amount indicated in Note 1b. Subsequently, Asia M3P2 issued Note 1b dated June 1, 2007, to Asia M3P2 promising the latter to pay the amount of US$35,675.11, subject to the terms and conditions of the Omnibus Notes Facility Agreement. aSTcCE 3. Note 2a US$1,352,311.86, for the partial payment of the Properties amounting to PHP424,229,865.00 on May 31, 2007. A Notice of Availment dated June 4, 2007, was issued by Asia M3P2 to Asia M3P1 for the amount of US$1,352,311.86. Based on the Certificate of Inward Remittance of UCPB dated July 24, 2007, an amount of US$1,352,311.86 (PHP61,895,313.84 at an exchange rate of PHP45.77 to US$1.00) was remitted by Asia M3P1 to the account of UCPB on June 4, 2007. Subsequently, Asia M3P2 issued Note 2a dated June 4, 2007, to Asia M3P2 promising the latter to pay the amount of US$1,352,311.86, subject to the terms and conditions of the Omnibus Notes Facility Agreement. 4. Note 2b US$174,500.00, for the payment of transaction fees and expenses relating to Note 2a. A Notice of Availment dated June 15, 2007, was issued by Asia M3P2 to Asia M3P1 for the amount of US$174,500.00. (No Certificate of Inward Remittance for this amount was submitted by Asia M3P2 to this Bureau.) Asia M3P2 issued Note 2b dated June 15, 2007, to Asia M3P2 promising the latter to pay the amount of US$174,500.00, subject to the terms and conditions of the Omnibus Notes Facility Agreement. TaDAHE 5. Note 3a US$4,750,500.00, for the partial payment of the Properties amounting to PHP421,609,335.00 on December 5, 2007. Based on the original letter of Puyat Jacinto and Santos Law Office dated September 14, 2007, Asia M3P2 has yet to issue Note 3a. 6. Note 3b US$65,500.00, for the payment of transaction related fees and expenses relating to Note 3a. Based on the same original letter, Asia M3P2 has yet to issue Note 3b. 7. Note 4 US$225,000.00, for the payment of transaction related fees and expenses relating to Note 3a. Based on the same original letter, Asia M3P2 has yet to issue Note 4. That the Notes will accrue interest at the rate of 15 percent per annum compounded monthly; that any interest unpaid as of each anniversary date of Note 1a will be capitalized and will form part of the facility; that the Notes have a maturity date of three years from the date of issuance of Note 1a on June 1, 2007, subject to extension upon mutual consent of the parties; that M3P2 may prepay at any time the whole or a part of the facility or may make a single payment of the whole facility on June 1, 2010, subject to extension upon mutual consent of the parties; and that in the event of default, M3P1 may demand M3P2 to pay the whole or unpaid facility and all accruing interests thereon. DcHSEa RULING A. On income tax In reply, please be informed that under Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), a foreign corporation like Asia M3P1, whether or not engaged in trade or business in the Philippines, is taxable only on income derived in the Philippines. Section 23 (F) provides: "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." In this case, since Asia M3P1 is not engaged in trade or business in the Philippines, based on the Certification of Non-Registration of Corporation/Partnership dated September 10, 2007, issued by the Securities and Exchange Commission, such interest derived by Asia M3P1 in the Philippines is generally subject to income tax at the rate of 20 percent. Section 28 (B) (5) (a) of the Tax Code of 1997 provides: DAESTI "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. 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;" However, any income derived by Asia M3P1 in the Philippines may be exempt from income tax in the Philippines (or partially exempt from tax if subject only to a reduced income tax rate) if such income is exempt (or partially exempt ) pursuant to a treaty obligation binding upon the Philippine government. Section 32 (B) (5) of the Tax Code of 1997 provides: aSEDHC "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: 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." With respect to a treaty that may be invoked by Asia M3P1 and all other residents of the Netherlands, there is the Philippines-Netherlands tax treaty. On the taxation of interest derived by Asia M3P1, Article 11 of the Philippines-Netherlands tax treaty provides as follows: "ARTICLE 11 Interest 1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: HDTSIE a) 10 percent of the gross amount if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 percent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in one of the States and paid in respect of a bond, debenture or other similar obligation of the Government of that State or of a political subdivision or local authority thereof shall be exempt from tax in that State; b) interest arising in one of the States and paid in respect of a loan made by or guaranteed or insured by the Government of the other State, the central bank of that other State or any agency or instrumentality (including a financial institution) owned or controlled by that Government shall be exempt from tax in the first-mentioned State." Under paragraph 2 of Article 11, interest arising in the Philippines and derived by a resident of the Netherlands is subject to Philippine income tax at the rate of (a) 10 percent of the gross amount of the interest if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, on any loan of whatever kind granted by a bank, or any other financial institution, or in respect of public issues of bonds, debentures or similar obligations; or (b) 15 percent of the gross amount of the interest in all other cases. Under the succeeding paragraph 3, such interest is even exempt from Philippine income tax if it is paid in respect of a bond, debenture or other similar obligation of the government of the Philippines, or a political subdivision or a local authority of the Philippines, or if the interest is paid in respect of a loan made, guaranteed, or insured by the government of the Netherlands, the central bank of the Netherlands, or any agency or instrumentality (including a financial institution) owned or controlled by the government of the Netherlands. AaCEDS Accordingly, the interest to be paid by Asia M3P2 to Asia M3P1 for the series of notes issued and to be issued (Notes 1a, 1b, 2a, 2b, 3a, 3b and 4) by Asia M3P2 to Asia M3P1 pursuant to the Omnibus Notes Facility Agreement dated June 1, 2007, is subject to Philippine income tax at a lower rate of 15 percent based on the gross amount thereof, pursuant to paragraph 2 (b), Article 11 of the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD 130-06 dated October 27, 2006) On the other hand, such interest to be paid by Asia M3P2 to Asia M3P1 cannot be subject to the much lower rate of Philippine income tax of 10 percent under paragraph 2 (a), or be exempt under paragraph 3, of Article 11, because the conditions laid down in availing either of these more preferential treatment is not satisfied in the case of the subject interest. Finally, the Omnibus Notes Facility Agreement is subject to documentary stamp tax under Section 179 of the Tax Code of 1997, as amended by Republic Act No. 9243, 5 as follows: "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. aIHCSA 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." 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. AIHDcC Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Signed on March 9, 1989, and effective on January 1, 1992. 2. Signed on December 23, 2002, and effective fifteen days after its publication from at least two newspapers of general circulation. 3. Signed on April 24, 2006, and effective fifteen days after its publication from at least two newspapers of general circulation. TcDIaA 4. "ARTICLE II Special Purpose Vehicle SEC. 4. Special Purpose Vehicle. An SPV shall be organized as a stock corporation in accordance with Batas Pambansa Blg. 68, otherwise known as 'The Corporation Code of the Philippines' and the rules promulgated by the Commission for purposes of registering the SPV: Provided, That if the SPV will acquire land, at least sixty percent (60%) of its outstanding capital stock shall be owned by Philippine nationals pursuant to Republic Act No. 7042, as amended, otherwise known as 'The Foreign Investments Act'. aESIDH SEC. 5. Powers of an SPV. An SPV shall have the following powers: (a) to invest in, or acquire Non-Performing Assets (NPAs) of Financial Institutions (FIs); (b) to engage third parties to manage, operate, collect and dispose of NPAs acquired from an FI; (c) to rent, lease, hire, pledge, mortgage, transfer, sell, exchange, usufruct, secure, securitize, collect rents and profits, and other similar acts concerning its NPAs acquired from an FI; (d) in case of Non-Performing Loans (NPLs), to restructure debt, condone debt and undertake other restructuring related activities. In restructuring debt, the SPV may reduce the principal, interest, interest rates, and the period for calculating the interest, extend the time for debt repayment or relax the conditions for debt repayment, agree to the conversion of the borrower's debt to equity in the borrower's business, agree to a transfer of assets or claims from the borrower to repay the debt or dispose of some of the borrower's property or claims to third persons; cSEAHa (e) to take, transfer shares or buy shares issued by the borrower for the purpose of business reorganization or rehabilitation of the borrower, subject to the provisions of the Corporation Code in respect of the rights of the shareholders of the borrower company, and apply any other measures or restructuring techniques with the approval of the Commission; (f) to enter into dation in payment (dacion en pago) arrangements, foreclose judicially or extra-judicially and other forms of debt settlement involving NPLs; (g) to spend funds to renovate, improve, complete or alter its NPAs acquired from an FI; (h) to issue equity or participation certificates or other forms of Investment Unit Instruments (IUIs) for the purpose of acquiring, managing, improving and disposing of its NPAs acquired from an FI; DSacAE (i) to borrow money and issue other instruments of indebtedness for the purpose of paying operational and administrative costs; (j) to guarantee credit, accept or intervene for honor the bills of borrowers; (k) to advance funds to borrowers where required by an acquired asset or any debt restructuring agreement pursuant thereto, or under any court order or rehabilitation plan; and (i) to entrust to third parties asset servicing company, the collection and receipt of the debt payments for debts under debt restructuring or business reorganization, management and disposition of assets of the SPV in accordance with the rules, procedures and conditions prescribed by the Commission or by the courts. Except in the case of real and other properties owned or acquired (ROPOAs) whose redemption periods have already expired, the SPV shall notify the borrower and all persons holding prior encumbrances upon the properties or a part thereof or are actually holding the same adversely to the borrower within fifteen (15) days from the date of the appointment of the said collection agent." 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 effective March 20, 2004. ASDCaI n Note from the Publisher: Written as Republic Act No. 9343 in the original document.