DA ITAD BIR Ruling No. 104-06

August 30, 2006 DA ITAD BIR RULING NO. 104-06 Article 11, Philippines-Japan, Philippines-Germany and Philippines-Netherlands Tax Treaties; BIR Ruling No. DA-ITAD 195-03; BIR Ruling No. DA-ITAD 99-05; BIR Ruling No. 32-05; BIR Ruling No. DA-ITAD 164-05 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: C.P. Noel Vice Chairman and Deputy Managing Partner Gentlemen : This refers to your letter dated November 14, 2005 and February 23, 2006 requesting tax treaty relief for the Nippon Export and Investment Insurance (NEXI) Loan Facility of STEAG State Power, Inc. (SPI). It is represented that SPI, (formerly, State Power Development Corporation as evidence by the attached copy of its Certificate of Filing of Amended Articles of Incorporation), is a corporation organized and existing under the laws of the Philippines with office address at 20/F Yuchengco Tower, RCBC Plaza, 6819, Ayala Avenue, Makati; that SPI and National Power Corporation (NAPOCOR) executed a Power Purchase Agreement (PPA) on June 27, 1998, as amended, whereby SPI agreed to build, operate and transfer to NAPOCOR a 200 MW coal-fired power plant, otherwise known as the Mindanao Power Project ("Project") located at the Phividec Industrial Estate in Misamis Oriental, Mindanao; that under the terms of the PPA, SPI will construct the power station and operate the same during an agreed cooperation period of twenty-five (25) years ("Cooperation Period"); that the Project costs are currently estimated at about US$305,000,000, which is funded by 75% debt and 25% equity; that on November 28, 2003, for purposes of financing the said Project, SPI (as the Borrower) entered into an Omnibus Agreement, with JBIC and commercial bank lenders, guaranteed by NEXI (as Lenders), which consists as follows: A. Tranche A or the JBIC Loan Facility will be financed by the JBIC, an entity wholly owned by the government of Japan in the amount of $60,600,000.00; B. Tranche B or the NEXI Loan Facility will be financed by commercial banks/lenders and will benefit from an Extended Political Risk Insurance ("Extended PRI") or guarantee to be provided by NEXI, a Japanese export credit agency or financial institution, the capital of which is wholly-owned and fully funded by the Japanese government through which Ministry of Economy, Trade and Industry of Japan (METI) transferred some of its services including trade insurance service, export credit agency and investment insurance service. It is further represented that among the commercial banks/lenders under the NEXI Facility are branch offices of Bayerische Hypo-und Vereinsbank AG (HVB-Germany), ING Bank N.V. (ING-Netherlands) and UFJ Bank Limited Facility will enjoy the Extended PRI or guarantee of NEXI; that Bayerische Hypo-und Verinsbank is a resident of Germany and is subject to corporate income tax of Germany with tax identification number 800/82007 as shown in the Certificate of Residence issued by the Tax Authority of Germany on July 5, 2005; that ING Bank N.V. is a nonresident corporation duly organized and existing under the laws of The Netherlands with registered office in Amsterdam as evidenced by its Articles of Association; that UFJ is a Japanese commercial bank with principal office located in Nagoya, Japan; that the abovementioned international commercial banks are not registered either as corporations or as partnerships in the Philippines as confirmed by the Certificates of Non-Registration, all dated March 17, 2005 issued by the Securities and Exchange Commission. HCATEa Finally, it is represented that under the terms of the JBIC and NEXI Loan Facilities, SPI will pay interest to JBIC and the abovementioned commercial banks; that SPI will also pay service fees, namely, Intercreditor Fee, JBIC Facility Agency Fee and the Lead Arranger Front End Fee to HVB, a non-resident German commercial bank, for performing services as the appointed agent of the JBIC and NEXI Loan Facility and for arranging the said credit facilities; and that the services of HVB as the appointed agent of JBIC and NEXI Loan Facilities are being performed entirely outside the Philippines as well as its services as the lead arranger of the said facilities. Based on the foregoing, you request confirmation that: (1) The interest income derived by Japan Bank for International Cooperation (JBIC) under the JBIC Loan Facility arranged with Steag State Power, Inc. (SPI), is exempt from Philippine income tax and consequently from withholding tax pursuant to Article 11(4)(a) of the Philippines-Japan tax treaty; (2) The interest payments derived by UFJ Bank, Limited (UFJ) from SPI under the NEXI Loan Facility are also exempt from Philippine income tax pursuant to Article 11(4)(a) of the Philippines-Japan tax treaty; and (3) That the Philippines-Germany and Philippines-Netherlands tax treaties will apply to the respective interest income that would be derived by HBV-Germany and ING-Netherlands in the Philippines under the NEXI Loan Facility. In reply, please be informed as follows: 1. On INTEREST on Tranche A or the JBIC Loan Facility Article 11 of the Philippines-Japan tax treaty provides: "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 the Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. xxx xxx xxx 3. 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 subparagraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States. 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 income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. xxx xxx xxx" Based on the foregoing provisions, interest arising in the Philippines and derived by the Government of Japan or any financial institution wholly owned by Japan, specifically the Overseas Economic Cooperation Fund (OECF) and the Japan Cooperation Agency (JICA), shall be exempt from income tax in the Philippines. Considering that in BIR Ruling No. DA-ITAD 21-99 dated August 24, 1999, the JBIC was recognized as a financial institution wholly owned by the Government of Japan when it took over the factions of the OECF, which was dissolved as of the date of establishment of the JBIC, this Office is of the opinion and so holds that the interest income derived by the JBIC from the JBIC Loan Facility it executed with SPI is exempt from Philippine income tax pursuant to the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 195-03 dated December 23, 2003) 2. On INTEREST on Tranche B or the NEXI Loan Facility Pursuant to Article 11(4)(c) of the Philippines-Japan tax treaty, interest derived by other residents of Japan will qualify for exemption from income tax provided it is arising from a debt claim that is guaranteed or indirectly financed by the Japanese Government or any financial institution wholly owned by the same and qualified entities referred to under the said treaty . Considering that NEXI is a Japanese export credit agency, the capital of which is wholly owned and fully funded by the Japanese government (as per letter dated may 17, 2004 of Mr. Masatsugu Asakawa, Director, International Tax Policy Division, Ministry of Finance Japan), this Office is of the opinion and so holds that the interest income received by UFJ-Japan from SPI on a loan guaranteed by NEXI is exempt from Philippine income tax and consequently from withholding tax (BIR Ruling NO. DA-ITAD 164-05 dated December 22, 2005) As regards the interest payments received by the branch office of HVB-Germany from SPI on the loan guaranteed by NEXI, Article 11 of the Philippines-Germany tax treaty provides: "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 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; a) 10 per cent if such interest is paid: (i) in connection with the sale on credit any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of such interest in all other cases xxx xxx xxx 3. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income from money lent by the taxation of the State from which the income is derived. xxx xxx xxx." Based on the foregoing, and since the interest income derived by HVB-Germany in the Philippines from the subject loan and paid to it by SPI is not in connection with any sale on credit of any industrial, commercial or scientific equipment or paid on any loan of whatever kind granted by a bank, or any other financial institution, or paid in respect of public issues of bonds debentures or similar obligations the same is subject to the preferential tax rate of 15 per cent of the gross amount of the interest under paragraph (2)(b) of the Philippines-Germany tax treaty. (BIR Ruling No. 32-05 dated April 13, 2005) EHDCAI Moreover, as regards interest income received by ING-Netherlands, Article 11 of the Philippines-Netherlands tax treaty provides: "Article 11 INTEREST 1. Interest arising in one of the States and paid to a resident of the other State may be taxable in that other State. 2. However, such interest may 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: a) 10 per cent 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) 25 per cent of the gross amount of the interest in all other cases xxx xxx xxx 3. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation 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. xxx xxx xxx." Based on this, the interest income derived by ING-Netherlands in the Philippines do not fall under the instances enumerated in Article 11(2)(a) of the Philippines-Netherlands that treaty since the interest to be paid by SPI are not in connection with any sale on credit of any industrial, commercial or scientific equipment or paid on any loan of whatever kind granted by a bank, or any other financial institution, or paid in respect of public issues of bonds, debentures or similar obligations. Therefore, the interest income of ING-Netherlands from the subject loan is subject to the preferential tax rate of 15 per cent of the gross amount of the interest. (BIR Ruling No. 32-05 dated April 13, 2005) Lastly, the Omnibus Agreement executed by SPI and JBIC and the commercial bank lenders guaranteed by NEXI is subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended. cIADaC This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service