DA ITAD BIR Ruling No. 130-06

October 27, 2006 DA ITAD BIR RULING NO. 130-06 Art. 11, Philippines-Netherlands Tax Treaty; BIR Ruling No. DA-ITAD-193-03; BIR Ruling No. DA-ITAD-45-03 Caltex (Philippines), Inc. 6F 6750 Ayala Avenue Makati City Attention: Mr. Nigel T. Avila Tax Manager Finance & Accounting Services Gentlemen : This refers to your letter dated June 14, 2004, requesting confirmation of your opinion that the interest on refinancing loans to be extended by Chevron Texaco Finance B.V. (CTFBV) to your company, Caltex (Philippines), Inc. (CPI), shall be subject to the preferential tax rate of 15% pursuant to the Philippines-Netherlands tax treaty. It is represented that CTFBV is a corporation organized and existing under the laws of the Netherlands with principal address at Weena-Zuid 166 3012 NC Rotterdam, The Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated November 17, 2003; that CPI is a corporation duly organized and existing under the laws of the Philippines with principal address at 6/F 6750 Ayala Avenue, Makati City; that on April 15, 2004, CTFBV and CPI entered into a Credit Agreement (Agreement) whereby CTFBV agrees to make loans to CPI during the period covering the date of the Agreement up to and including the Commitment Termination Date, in an aggregate principal amount of Four Hundred Million US Dollars (US$400,000,000.00) at any one time outstanding up to but not exceeding CTFBV's Commitment, 1 as it is originally executed or as it may from time to time be supplemented, modified or amended; that under the Agreement, CPI promises to pay CTFBV interest on the unpaid principal amount of each loan for the period commencing on the date of the loan and continuing until the Final Maturity Date at a rate equal to the Applicable Rate as determined with respect to each interest period, provided that interest shall be payable at the Post-Default Rate on any loan or any installment thereof or any interest thereon which shall not be paid in full when due for the period commencing on the due date thereof until the same is paid in full; that during the period commencing on the date of the Agreement and terminating on the Commitment Termination Date, CPI agrees to pay CTFBV a Commitment Fee, which shall be payable quarterly on each Quarter day and at the rate of 0.05% per annum; that the Commitment Fee shall be payable quarterly on each Quarter day and at the Final Maturity Date and shall be computed on the basis of a 360-day year and actual days elapsed; that the Final Maturity Date of the said credit agreement is on April 30, 2016. In reply, please be informed that 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. aDSHCc 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: 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) 15 per cent of the gross amount of the interest in all other cases. xxx xxx xxx 5. 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 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. xxx xxx xxx" Based on the aforequoted provisions, interest income arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a preferential tax rate not exceeding ten percent (10%) of the gross amount of interest if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or 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; and in all other cases, fifteen percent (15%) of the gross amount of the interest. Such being the case, this Office hereby confirms your opinion that the interest payments by CPI to CTFBV shall be subject to a preferential tax rate of fifteen percent (15%) based on the gross amount of the interest, pursuant to the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD-193-03 dated December 16, 2003) In addition thereto and with regard to the Commitment Fee payable under the Agreement, please be informed that the term "interest" refers to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. It includes the amount paid for the borrower's use of the money during the term of the loan, as well as for his detention of money after the due date for its repayment. (Sec. 2(a), Revenue Regulations No. 13-00) Thus, payment for interest presupposes the use of one person of another person's money. The commitment fee, however, constitutes payment for CTFBV's undertaking to make available a credit line to CPI but which the latter failed to fully use or avail of. In fact, the payment of the commitment fee assumes the non-use of the full credit line by CPI and for this reason, could not be considered as interest payment. Therefore, the commitment fee, not being interest payment, shall not be subject to the 10% final withholding tax. Further, the commitment fee is considered as payment for services rendered by CTFBV outside the Philippines, and thus the same shall not be subject to any Philippine income tax. (BIR Ruling No. DA-ITAD-45-03 dated March 17, 2003) Moreover, even if considered as derived from Philippine sources, the commitment fee is not taxable to CTFBV because the latter has no permanent establishment in the Philippines as defined under the Philippines-Netherlands tax treaty, CTFBV not having a branch, or an office in the Philippines. Finally, the Credit Agreement executed by and between CTFBV and CPI shall be subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended. 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 Footnotes 1. "Commitment" shall mean the obligation of Lender to make Loans to the Borrower in an aggregate amount equal to US$400,000,000.00 outstanding at any time, subject to the provisions of Section 3.02 hereof.