DA ITAD BIR Ruling No. 157-06

December 15, 2006 DA ITAD BIR RULING NO. 157-06 Art. 11, Philippine-Germany Tax Treaty; Art. 11, Philippine-Netherlands Tax Treaty; Sec. 23 (F) in connection with Sec. 42 (A) (3) of the Tax Code of 1997; BIR Ruling No. DA-ITAD 105-05; BIR Ruling No. DA-ITAD 55-05 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 request for clarification of the following: 1) That the Intercreditor Agency Fee, JBIC Facility Agency Fee and the Lead Arranger Front End Fee to be paid by STEAG State Power, Inc. (SPI) to Bayerische Hypo-und Vereinsbank AG (HVB) for services performed by the latter outside of the Philippines are considered income derived from sources outside the Philippines and therefore not subject to Philippine income tax and any withholding tax. 2) That the interest income derived by HVB-Germany and ING-Netherlands in the Philippines from the loan agreement referred to in BIR Ruling No. DA-ITAD 104-06 dated August 30, 2006 is subject to tax at a rate of 10% of the gross amount of the interest under the provisions of Article 11(2)(a)(ii) of the Philippines-Germany and Philippines-Germany and Philippines-Netherlands tax treaties, respectively. THCSAE The factual representations recited in BIR Ruling No. DA-ITAD 104-06 dated August 30, 2006 are hereby adopted. In addition thereto, it is also represented that SPI will pay service fees, namely Intercreditor Fee, JBIC Facility Agency Fee and the Lead Arranger Front End Fee to HVB, a nonresident 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 HBV 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. In reply, please be informed of the following: 1) On the Intercreditor Agency, JBIC Facility Agency and the Lead Arranger Front End Fees that will be paid by SPI to HVB Section 23(F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: "Section 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. xxx xxx xxx According to Section 23(F), a foreign corporation like HVB is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources within the Philippines if the services are performed in the Philippines, as stated in Section 42(A)(3) of the Tax Code of 1997, as amended, below: "Section 42. Income from Sources Within the Philippines . A. Gross Income From Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines; xxx xxx xxx" Such being the case and since the subject services were carried out entirely outside the Philippines, the intercreditor agency, JBIC facility agency and the Lead Arranger front end fees paid by SPI to HVB, being income not derived from sources within the Philippines by a foreign corporation, are exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 105-05 dated August 24, 2005) IcSHTA 2) On Interest income derived by HVB-Germany and ING-Netherlands in the Philippines arising from the loan agreement 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 of 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 4. 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 law of the State from which the income is derived. xxx xxx xxx." Article 11 of the Philippines-Netherlands tax treaty also provides: "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 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 TcICEA (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 Act. xxx xxx xxx." In view of all the foregoing, the interest income derived by HVB and ING, in the Philippines falls under interest income "on any loan of whatever kind granted by a bank or any other financial institutions", and is subject to the preferential tax rate of 10 percent of the gross amount of the interest under paragraph (2)(a)(ii) for both the Philippines-Germany and Philippines-Netherlands tax treaties, respectively. (BIR Ruling No. DA-ITAD 55-05 dated June 16, 2005) This ruling supplements BIR Ruling No. DA-ITAD 104-06 dated August 31, 2006 and applies the appropriate final withholding tax rate with respect to the interest income derived by HVB and ING in the Philippines in the light of the additional factual representation. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service