ITAD BIR Ruling No. 019-12

January 10, 2012 ITAD BIR RULING NO. 019-12 Article 11 (Interest); Philippines-Singapore tax treaty; BIR Ruling No. ITAD 50-10 Masin AES Pte. Ltd. Philippine Branch Masinloc Coal-Fired Thermal Power Plant Barangay Bani, Masinloc Zambales Attention: Moazzam Nazir Chanda Chief Finance Officer Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 21, 2011 requesting confirmation that interest paid by Masin AES Pte. Ltd. Philippine Branch ("Masin Philippine Branch") to AES Phil Investment Pte. Ltd. ("AES Phil") is subject to income tax at the rate of 15 percent pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . AES Phil is a foreign corporation organized and existing under the laws of Singapore and is a resident thereof based on its Memorandum and Articles of Association, on the Certificate Confirming Incorporation of Company issued by the Accounting and Corporate Regulatory Authority of Singapore on July 21, 2011, and on the Certificate of Residence issued by the Inland Revenue Authority of Singapore on July 18, 2011. AES Phil is situated at Suntec Tower One, 7 Temasek Boulevard, Singapore. AES Phil is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 22, 2011. On the other hand, Masin Philippine Branch is the branch office in the Philippines of Masin AES Pte. Ltd. of Singapore, situated at Masinloc Coal-Fired Thermal Power Plant, Barangay Bani, Masinloc, Zambales, Philippines. On March 12, 2008, Masin Philippine Branch and AES Phil entered into a Subordinated Loan Agreement where AES Phil agreed to grant Masin Philippine Branch a credit facility of US$147,126,437.00. Each disbursement or drawdown shall have a minimum of US$10,000.00 and shall constitute a loan subject to a fixed rate of interest of 8 percent per annum. Interest shall be computed every six months beginning from the date of disbursement or drawdown. All unpaid interests and principals on the loans shall be paid not later than February 15, 2026. Based on the Certification issued by the main office of Hong Kong and Shanghai Banking Corporation Ltd. 1 in the Philippines on April 18, 2011, AES Phil remitted US$147,126,430.05 (net of applicable bank charges) to the account of Masin Philippine Branch on April 2, 2008 . IDEHCa Ruling In reply, please be informed that under Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") ,effective November 4, 2010, any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau before the first taxable event subject of the TTRA, thus: "Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under the RMO." (Emphasis ours) In view of the foregoing, since the whole loan of US$147,126,437.00 under the Subordinated Loan Agreement was remitted by AES Phil to Masin Philippine Branch on April 2, 2008, and interest on such loan is computed and paid after every six months from that date beginning October 2, 2008, and on April 2 and October 2 of the succeeding years, until the maturity of the loan, but since the subject TTRA was filed only on September 21, 2011, this Office hereby DENIES relief on interests paid by Masin Philippine Branch to AES Phil on or before such date of filing on September 21, 2011, pursuant to Section 14 of RMO 72-2010. Accordingly, these interests shall be subject to income tax at the rate of 20 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, to wit: "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;" On the other hand, interests paid by Masin Philippine Branch to AES Phil on September 22, 2011 and thereafter and until the maturity of the loan shall be subject to income tax at the rate of 15 percent under paragraph 2, Article 11 of the Philippines-Singapore tax treaty, to wit: "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 if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 percent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. (BIR Ruling No. ITAD 50-10 dated October 12, 2010)" DTEcSa Finally, under Section 179 of the Tax Code, the subject Subordinated Loan Agreement is subject to documentary stamp tax of P1.00 for every P200.00 (or a fraction thereof) of the whole amount of the loan granted and remitted by AES Phil to Masin Philippine Branch, to wit: "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." 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 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