ITAD BIR Ruling No. 116-16

June 29, 2016 ITAD BIR RULING NO. 116-16 Article 11 (Interest), Philippines-Netherlands tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Head, Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on October 8, 2007 requesting confirmation, among others, that interest paid by Team Energy Corporation ("Team Energy") (formerly Crimson Power Holdings Corporation ) to Nomura Philippine Power Funding Company BV ("Nomura") [now PPF Company BV ("PPF Company") ] is subject to income tax at the rate of 10 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . Nomura is a foreign corporation and a resident of the Netherlands based on its amended Articles of Association; the extract issued by the Netherlands Chamber of Commerce Commercial Register on July 18, 2013; and its Residence Certificate issued by the Tax Administration of Amsterdam in the Netherlands on August 10, 2007. Nomura is located at Atrium 1st Floor, Strawinskylaan 3109, 1077 ZX, Amsterdam, Netherlands. Nomura 's objects as a company is to grant loans and to exercise all rights under these loans as well as all rights connected to the receivables resulting from these loans; to borrow money by way of issuing securities or by entering into loan agreements in order to be able to grant the loans; and to provide security rights in relation thereto. Based on the letter issued by the De Nederlandsche Bank to Nomura on August 22, 2007, Nomura qualifies as a Special Financial Institution and is registered as such under number 10017494 and in that capacity is obliged to report to the De Nederlandsche Bank for the purpose of compiling the balance of payments in the Netherlands. The obligation to report is determined by law pursuant to section 7 of the External Financial Relations Act of March 25, 1994. Nomura is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on July 25, 2007. On the other hand, Team Energy is a domestic corporation located at 25th Floor, Fifth Avenue Building, 5th Avenue, Bonifacio Global City, Taguig City, Philippines. On June 7, 2007, Team Energy and Nomura entered into a Mezzanine Facility Agreement where Nomura granted Team Energy a loan amounting 230 million US dollars which would be available for drawdown on such date specified by Team Energy in its utilization request to Nomura . The loan bears interest at the rate of 9.25 percent per annum. CAIHTE Based on the utilization request issued by Team Energy to Nomura on June 13, 2007, it requested to draw 224 million US dollars from the facility on June 20, 2007. Of this amount, 214,779,237.00 US dollars was received by Team Energy as proceeds after deducting 20,763.00 US dollars as commitment fee and 9.2 million US dollars as arrangement fee. Based on the certification issued by Credit Suisse Singapore Branch 1 on June 29, 2007, the proceeds were remitted and credited to Team Energy 's account on June 20, 2007. Based on the sworn statement issued by Team Energy on June 19, 2014, it has made to date the following payments of principal and interest to Nomura through Mizuho Bank Ltd. Singapore Branch: Principal Date of Principal Payment Jun. 20, 2008 P1,704,736.93 Dec. 20, 2010 20,000,000.00 Jun. 20, 2014 202,295,263.07 Total P224,000,000.00 ============= Interest Date of Interest Principal Interest Period Interest Payment Subject Rate to Interest Dec. 21, 2007 P10,590,222.22 P224,000,000.00 Jun. 20, 2007-Dec. 21, 2007 9.25% Jun. 20, 2008 10,475,111.11 222,295,263.07 Dec. 21, 2007-Jun. 20, 2008 9.25% Dec. 22, 2008 10,566,743.58 222,295,263.07 Jun. 20, 2008-Dec. 22, 2008 9.25% Jun. 22, 2009 10,395,390.98 222,295,263.07 Dec. 22, 2008-Jun. 22, 2009 9.25% Dec. 21, 2009 10,395,390.98 222,295,263.07 Jun. 22, 2009-Dec. 21, 2009 9.25% Jun. 21, 2010 10,395,390.98 222,295,263.07 Dec. 21, 2009-Jun. 21, 2010 9.25% Dec. 20, 2010 10,395,390.98 202,295,263.07 Jun. 21, 2010-Dec. 20, 2010 9.25% Jun. 20, 2011 9,460,113.20 202,295,263.07 Dec. 20, 2010-Jun. 20, 2011 9.25% Dec. 20, 2011 9,512,091.85 202,295,263.07 Jun. 20, 2011-Dec. 21, 2011 9.25% Jun. 20, 2014 9,512,091.84 202,295,263.07 Dec. 20, 2011-Jun. 20, 2012 9.25% Total P101,697,937.72 ============= On June 14, 2013, this Bureau issued BIR Ruling No. ITAD 156-13 where it ruled, among others, that interest paid by Team Energy to Nomura under the Mezzanine Facility Agreement is subject to income tax at the rate of 15 percent pursuant to paragraph 2 (b), Article 11 (Interest) of the Philippines-Netherlands tax treaty. However, a perusal of Team Energy 's request dated October 8, 2007 discloses that the original requested tax rate was 10 percent under paragraph 2 (a) (ii) of said article. Hence, Team Energy requested a reconsideration. In reply, please be informed that paragraph 2 (a) (ii), Article 11 of the subject treaty provides: "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: xxx xxx xxx (ii) on any loan of whatever kind granted by a bank, or any other financial institution," Under the above provision, interest arising in the Philippines and paid to a resident of the Netherlands is subject to income tax at the rate of 10 percent if the interest is paid in respect of a loan granted by a bank or any financial institution. Accordingly, considering that Nomura qualifies as a special financial institution in the Netherlands by reason of its primary business activities of granting loans and exercising rights on these loans and on receivables pertaining to these loans, and that it is subject to banking compliance and reportorial requirements in the Netherlands, such interest paid by Team Energy to Nomura under the Mezzanine Facility Agreement is subject to income tax at the rate of 10 percent pursuant to paragraph 2 (a) (ii), Article 11 of the Philippines-Netherlands tax treaty. This ruling amends pertinent portion of BIR Ruling No. ITAD 156-13. This ruling is issued on the basis of the actual 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. DETACa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 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