ITAD BIR Ruling No. 309-14

October 24, 2014 ITAD BIR RULING NO. 309-14 Article 11, Philippines-Germany tax treaty Puno & Puno Law Offices 12th Floor East Tower Philippine Stock Exchange Center Exchange Road, Ortigas Center Pasig City Attention: Atty. Ma. Elizabeth E. Peralta-Loriega Atty. Cecily C. Ramirez-dela Cruz Atty. Recolito Ferdinand N. Cantre Jr. Gentlemen : This refers to your tax treaty relief application filed on July 30, 2014, requesting confirmation that interests payable by FIRST NATGAS POWER CORPORATION ("FNPC") to KREDITANSTALT FR WIEDERAUFBAU ("KfW") are exempt from Philippine income tax pursuant to Article 11 (3) (b) of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). It is represented that KfW is a public law institution, established under the German Law Concerning the KfW dated November 5, 1948 and a resident of Germany based on the Tax Residency Certificate issued by the German Tax Administration on January 29, 2014; that KfW is situated at Palmengartenstrasse 5-9, 60325 Frankfurt am Main, Germany; that KfW is engaged in financing; that all obligations of KfW in respect of loans are guaranteed by the Federal Republic of Germany; that KfW is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission ("SEC") on February 6, 2014; and that, on the other hand, FNPC is a domestic corporation engaged in the power generation business and is situated at 3rd Floor, Benpres Building, Exchange Road corner Meralco Avenue, Pasig City, Philippines. It is further represented that on July 10, 2014, KfW, as original Lender, and FNPC, as Borrower, entered into a Hermes 1 Covered Facility Agreement (the "Agreement") to finance an Equipment Supply Contract (the "Supply Contract") relating to the construction of a 450MW combined cycle power plant; that the Supply Contract is an agreement between Siemens Aktiengesellschaft (Supplier) and the FNPC relating to the design, procurement, execution and completion by the Supplier of the power plant; that under the Agreement, KfW agreed to make available to FNPC a term loan facility in an aggregate amount not exceeding US$265,000,000.00; that the loan shall be used to finance the following: i. Payments to be made or payments made by FNPC to the Supplier under the Supply Contract in respect of German goods and services, up to an aggregate amount of 85 percent of the Contract Amount, in a maximum aggregate amount up to US$215,000,000.00; aEIADT ii. After the First Loan requested in a Disbursement Request or Reimbursement Request has been made, interest during construction in a maximum aggregate amount up to US$28,000,000.00; and/or iii. Export Credit Insurance Premium in a maximum aggregate amount up to US$22,000,000.00. That under the terms of the Agreement, each drawdown by FNPC shall be remitted directly by KfW to the Supplier as payment by FNPC to the Supplier under the Supply Contract; that, as such, the loan proceeds are not inwardly remitted to the Philippines but to an account offshore designated by the Supplier; that as consideration for any amount loaned, FNPC will pay interest at 3.12 percent per annum which is the USD Commercial Interest Reference Rate (CIRR) applicable to the Agreement pursuant to the OECD Arrangement on Officially Supported Export Credits dated October 1, 2013 plus the CIRR Surcharge of 0.25 percent per annum; that the interest shall be paid semi-annually in arrears on the last day of each interest period; that if FNPC fails to pay any amount payable by it under the Agreement on due date, it shall pay interest on such overdue amount from its due date to the date of the actual payment at a rate equal to the aggregate of the LIBOR USD overnight rate plus 2 percent per annum; and that the loan facility is duly approved by the Philippine Monetary Board. It is finally represented that the interest subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the authorized officer of KfW on March 12, 2014. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that interest to be paid to KfW, being a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 20 percent, thus: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (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; xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such interest may be exempt from tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: ACIDTE 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" Relative thereto, you invoke the Philippines-Germany tax treaty. Paragraphs 1, 2, 3 and 4, Article 11 thereof provide: "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. 3. Notwithstanding the provisions of paragraph 2, aDHCcE a) interest arising in the Federal Republic of Germany and paid to the Philippine Government and the Central Bank of the Philippines shall be exempt from German tax; b) interest arising in the Republic of the Philippines and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fur Wiederaufbau or the Deutsche Gesellschaft fur wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Philippine tax. The competent authorities of the Contracting States shall determine by mutual agreement any other governmental institution to which this paragraph shall apply. 4. Notwithstanding the provisions of paragraph 2 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived in respect of a loan made, guaranteed or insured by a governmental instrumentality of the other Contracting State as by 'Hermes Deckung' in the case of the Federal Republic of Germany and by the Central Bank in the case of the Republic of the Philippines, or any other instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Contracting States. 5. 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 assimilated to income from money lent by the taxation law of the State from which the income is derived. xxx xxx xxx" Under paragraph 2 of Article 11, interest arising in the Philippines and derived by a resident of Germany is subject to Philippine income tax at the rate of 10 percent of the gross amount of the interest if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or any loan of whatever kind granted by a bank, or in respect of public issues of bonds, debentures or similar obligations. Moreover, under the succeeding paragraph 3, such interest is exempt from Philippine income tax if the interest is paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fur Wiederaufbau (KfW) or the Deutsche Gesellschaft fur wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft). aICHEc Accordingly, since the interest under the Agreement will be payable by FNPC to KfW, a German public financial institution, such payment is exempt from Philippine income tax pursuant to Article 11 (3) (b) of the Philippines-Germany tax treaty. 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 Bureau of Internal Revenue Footnotes 1. Hermes means Euler Hermes Aktiengesellschaft, acting on behalf of the Federal Republic of Germany.