ITAD BIR Ruling No. 127-11

April 15, 2011 ITAD BIR RULING NO. 127-11 Article 12, Philippines-US Tax Treaty; BIR Ruling No. 142-95; BIR Ruling No. ITAD-84-00; BIR Ruling No. ITAD-195-00; BIR Ruling No. ITAD-87-02; BIR Ruling No. ITAD-187-03 GNPower Ltd., Co. 1905 Orient Square Bldg. Don Francisco Ortigas, Jr. Road Ortigas Center, Pasig City, 1605 Attention: Mr. Carmelo Q. Limbaga Controller Gentlemen : This refers to your letter dated December 21, 2007, filed on behalf of GNPower Limited Partner Holdings LLC (hereinafter referred to as "GNPower US" ), requesting approval of the application for relief from double taxation and for the use of a preferential final withholding tax rate of 15 percent on the interest income of GNPower US on the loan extended by it to GNPower Ltd. Co. (hereinafter referred to as "GNPower Phils" ) under a Convertible Bridge Loan Agreement pursuant to Article 12 (2) of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income (hereinafter referred to as "Philippines-US tax treaty" ). SIDEaA It is represented that GNPower US is a nonresident foreign corporation organized and existing under the laws of the United States of America (U.S.A.), with principal office address at 200 Clarendon Street, 25th Floor, Boston, MA, U.S.A., as evidenced by its Certificate of Formation issued by the Secretary of State of the State of Delaware, USA; that GNPower US is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on December 10, 2007; and that GNPower Phils is a corporation duly organized and existing under the laws of the Philippines with principal address located at 1905 Orient Square Building, Don Francisco Ortigas Jr., Ortigas Center, Pasig City 1605. It is further represented that GNPower Phils wishes to develop a 2 x 300 MW (net) clean pulverized coal-fired power plant, including transmission and sub-transmission lines and dedicated jetties located in Barangay Alasasin, Municipality of Mariveles, Province of Bataan; that on July 23, 2007, GNPower US and GNPower Phils entered into a Convertible Bridge Loan Agreement (Loan Agreement) which was amended and restated on October 1, 2007, whereby GNPower US made available to GNPower Phils a loan facility (Facility) in the aggregate amount of US$13,300,000.00; that the said Loan Agreement is Part 2 of the Amended and Restated Omnibus Loan and Security Agreement dated July 23, 2007 as amended and restated as of October 1, 2007; that the interest on each loan disbursed under the Facility shall accrue at the rate of twelve percent (12%) per annum computed on the basis of a 360-day year for the actual number of days lapsed from the date on which such loan is disbursed until such loan is paid in full or converted in accordance with the terms of the Loan Agreement; and that in a sworn certification issued by GNPower Phils' Project Comptroller dated September 22, 2008, the transaction subject of the herein application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to interest received by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interest, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" Thus, Article 12 of the Philippines-US tax treaty, which you have invoked, may apply to your instant request for relief. It provides: ITaESD "Article 12 INTEREST 1. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. 3. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of such interest. xxx xxx xxx 5. Paragraphs 2, 3, and 4 shall not apply if the recipient of interest from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. 6. Where an amount is paid to a related person and would be treated as interest but for the fact that it exceeds an amount which would have been paid to an unrelated person, the provisions of this Article shall apply only to so much of the amount as would have been paid to an unrelated person. In such a case, the excess amount may be taxed by each Contracting State according to its own law, including the provisions of this Convention where applicable. 7. The term 'interest' as used in this Convention 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, as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises, including interest on deferred payment sales." Based on the foregoing, interest payments to a resident of the United States which does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding 10 percent of the gross amount of interest with respect to public issues of bonded indebtedness; and a tax rate not exceeding 15 percent of the gross amount of interest in all other cases. Such being the case, and since GNPower US is not engaged in business in the Philippines through a permanent establishment situated therein and the interest is not with respect to public issues of bonded indebtedness, the interest to be remitted by GNPower Phils to GNPower US under the said Loan Agreement is subject to the preferential tax rate of 15 percent, based on the gross amount thereof, pursuant to Article 12 (2) the Philippines-US tax treaty. (BIR Ruling No. 142-95 dated September 13, 1995; BIR Ruling No. ITAD-84-00 dated August 1, 2000; BIR Ruling No. ITAD-195-00 dated December 8, 2000; BIR Ruling No. ITAD-87-02 dated May 9, 2002; BIR Ruling No. DA-ITAD 187-03 dated December 1, 2003 dated December 1, 2003) Moreover, the said Loan Agreement is subject to the documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997, as amended, at the rate of One Peso (Php1.00) on each Two Hundred Pesos (Php200.00) or fractional part thereof, of the issue price of such Loan Agreement. 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. CIAHaT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue