DA ITAD BIR Ruling No. 091-08

November 5, 2008 DA ITAD BIR RULING NO. 091-08 Article 10, Philippines-United Kingdom tax treaty; Article 11, Philippines-Switzerland tax treaty; BIR Ruling No. DA-ITAD 78-01; BIR Ruling No. DA-ITAD 54-05 PNOC Energy Development Corporation Energy Center, Merritt Road, Fort Bonifacio Taguig, Metro Manila Attention: Felicito A. Gesite Treasury Manager Gentlemen : This refers to your letters dated 28 February 2005, 14 July 2005 and 06 December 2005 requesting confirmation that the interest to be paid by PNOC Energy Development Corporation (PNOC-EDC) to Standard Chartered Bank Singapore Branch (SCB-Singapore) and Atlantic Forfaitierungs AG (Atlantic) is subject to a preferential rate, pursuant to the Philippines-United Kingdom (Philippines-UK) tax treaty and Philippines-Switzerland tax treaty. cTaDHS It is represented that Standard Chartered Bank (SCB-UK) is a nonresident foreign corporation duly organized and existing under the laws of the United Kingdom (UK) and is a resident of and taxable in the UK per Tax Residency Certificate issued by the Inland Revenue of UK dated 06 December 2004; that SCB-UK is licensed to do business in the Philippines through a branch office, Standard Chartered Bank Manila Branch (SCB-Manila), duly registered with the Securities and Commission (SEC); that SCB-Singapore is a branch of SCB-UK and is not registered either as a corporation or as a partnership in the Philippines per Certificate of Non-Registration of Corporation/Partnership issued by the SEC on 20 January 2005; that Atlantic is a nonresident foreign corporation duly organized and existing under the laws of Switzerland with office address at Othmarstrasse 8, 8008 Zurich, Switzerland; that Atlantic is not registered either as a corporation or partnership in the Philippines per Certificate of Non-Registration of Corporation/Partnership issued by the SEC on 02 December 2005; that PNOC-EDC, on the other hand, is a government-owned and controlled corporation organized and existing under the laws of the Philippines with office address at Building 5, Energy Center, Merritt Road, Fort Bonifacio, Taguig, Metro Manila. EDATSI It is further represented that on 05 July 2004, PNOC-EDC (as Borrower), SCB-UK (as Arranger and Original Lender), SCB-Manila, as Original Lender, and Standard Chartered Bank (Hong Kong) Limited (SCB-Hong Kong), as Facility Agent, entered into a Loan Agreement (Agreement) for a dollar term loan facility in the aggregate amount of US$75 Million; that under the Agreement, each lender will participate in the loan in the proportion which its commitment bears to the Total Commitments; 1 that SCB-Manila participated in the loan for US$15 Million while the balance of the loan facility which is US$60 Million was funded by SCB-Singapore as sole underwriter thereof; that interest on the loan shall be at a rate per annum determined by the SCB-Hong Kong to be the aggregate of LIBOR 2 for the period and the Margin; that if PNOC fails to pay any sum payable under any Finance Document 3 (under the Agreement) to which it is a party when due, it shall be subject to Default Interest at the rate per annum determined by the Facility Agent to be the aggregate of 1%, the Margin 4 and LIBOR; that under this Agreement, SCB-UK and SCB-Manila appointed SCB-Hong Kong as its agent in relation to the administration of the Facility and its agent in relation to the Guarantee; that any Lender 5 may at any time transfer by novation all or part of its rights, benefits and/or obligations under or arising out of the Agreement and the corresponding benefit of the Guarantee to an Eligible Transferee; that SCB-Singapore, as underwriter, transferred by novation portions of its commitment under the Agreement to, among others, Atlantic; that the loan is fully registered and guaranteed by the Republic of the Philippines through the Department of Finance; that on 04 August 2004, through the Standard Chartered Bank New York (SCB-New York), SCB-Hong Kong, acting as facility agent, remitted US$73,904,500.00 to PNOC-EDC's account with the Bangko Sentral ng Pilipinas; that effective 04 May 2005, SCB-Singapore transferred to Atlantic a part of its commitment and the corresponding benefit, rights and obligations of the Guarantee in the amount US$2,000,000.00. ADCIca In reply, please be informed that Article 10 of the Philippines-UK and Article 11 of the Philippines-Switzerland tax treaties provide as follows: Philippines-UK tax treaty "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. xxx xxx xxx 5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, including premiums and prizes attaching to such securities, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other debts-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. TcHEaI 6. The provisions of paragraphs 1, 2 and 3 of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on a trade or business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State professional 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 a case, the provisions of Article 7 or 13, as the case may be, shall apply. xxx xxx xxx" Philippines-Switzerland tax treaty "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 recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 3. 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 income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation laws of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. EIDaAH 4. The provisions of paragraphs 1 and 2 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 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 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. xxx xxx xxx" Based on the above provisions of the Philippines-UK and Philippines-Switzerland tax treaties, interest arising in the Philippines and paid to a resident of the UK and of Switzerland may be taxed in the Philippines at a preferential rate not to exceed 15 percent (15%) and ten percent (10%) of the gross amount of interest, respectively, if the recipient is the beneficial owner thereof. However, the said preferential tax rates do not apply if the beneficial owner of the interest from the UK or Switzerland, as the case may be, carries on trade or business in the Philippines through a permanent establishment situated in the Philippines and the loan facility of which the interest is paid is effectively connected with such permanent establishment. aESHDA Such being the case, since SCB-UK does not carry on a trade or business in the Philippines through a permanent establishment and the loan of which the interest is paid is not effectively connected with a permanent establishment, this Office is of the opinion and so holds that the interest income derived by SCB-UK and paid to SCB-Singapore, as sole underwriter of the subject loan, under the subject loan facility extended to PNOC-EDC shall be subject to a preferential withholding tax rate of 15% of the gross amount of the interest pursuant to Article 10 (2) of the Philippines-UK tax treaty. (BIR Ruling No. DA-ITAD 78-01 dated 19 September 2001) Moreover, since Atlantic is an Eligible Transferee of the portion of the amount of US$2,000,000.00, and since Atlantic does not carry on a trade or business in the Philippines through a permanent establishment, and that the loan of which the interest is paid is not effectively connected with a permanent establishment in the Philippines, the interest income derived by Atlantic pursuant to the novation shall be subject to a preferential withholding tax rate of 10% of the gross amount of the interest pursuant to Article 11 (2) of the Philippines-Switzerland tax treaty. (BIR Ruling No. DA-ITAD 54-05 dated 15 June 2005) Finally, the Facility Loan Agreement shall be subject to the documentary stamp tax imposed under Section 197 of the National Internal Revenue Code of 1997 (Tax Code) as amended by Republic Act No. 9243, to wit: "SEC. 197. 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 thereof of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1), the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term 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. IDSETA 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 contract is located or used in the Philippines, instruments and securities issued by the governments 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 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 based on 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. HaECDI Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group Footnotes 1. "Total Commitments" means the aggregate of the Commitments, being US$75,000,000,000.00 as the date of Agreement (Loan Agreement, page 6). 2. "LIBOR" means, in relation to any relevant sum and any relevant period (Loan Agreement, page 3). 3. "Finance Document" means the Agreement, the Guarantee, any Fee Letter and any other document designated as a "Finance Document" by the Facility Agent and the Borrower (Loan Agreement, page 3). 4. "Margin" means two point twenty two per cent (2.22%) annum. 5. "Lenders" means the Original Lenders and each Assignee and Transferee but such term shall not include any Original Lender in respect of which (a) no amount is or may become owing to or by it under this Agreement and (b) whose Commitment has been cancelled or reduced to nil. cCaEDA