ITAD Ruling No. 029-04

March 29, 2004 ITAD RULING NO. 029-04 RP-Germany, Articles 2 and 11 BIR Ruling No. ITAD-43-00 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty . C . P . Noel Head, Tax Services Gentlemen : This refers to your letter dated March 5, 2004, on behalf of your client, Steag State Power, Inc. (SPI, formerly known as State Power Development Corporation), requesting confirmation of your opinion that the interest income to be paid by SPI to resident commercial banks of Germany, more specifically, Bayerische Hypo-und Vereinsbank, AG ( HVB ), Dresdner Bank AG ( Dresdner ) and Kreditanstalt fur Wiederaufbau ( KfW ), under the GKA Facility (Bundesgarantie fr Direktinvestitionen im Ausland) described hereunder, are exempt from Philippine income tax pursuant to Article 11(4) of the Philippines-Germany tax treaty. It is represented that SPI is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address at State Center II, Ortigas Avenue, Mandaluyong City; that on June 27, 1998, as amended on March 2, 2001 and February 4, 2003, SPI and the National Power Corporation (NPC) entered into and executed a Power Purchase Agreement (PPA) whereby SPI agreed to build, operate and transfer to NPC a 200 MW coal-fired power plant to be located at the PHIVIDEC Industrial Estate, Misamis Oriental, Mindanao; that under the terms of the PPA, SPI will construct the power plant and operate the same during an agreed cooperation period of twenty-five (25) years; that the cost of the project is currently estimated at US$305,000,000.00, to be funded by 70% debt and 30% equity; that one of the loan facilities is a 100 Million Dollar Facility (the "GKA Facility") arranged by HVB , Dresdner and KfW ; that HVB , Dresdner and KfW are non-resident foreign banks duly organized and existing under the laws of Germany; that they are not registered either as corporations or as partnerships and have not been licensed to do business in the Philippines per certifications issued by the Securities and Exchange Commission dated March 1, 2004 in the case of HVB and Dresdner , and March 10, 2004 in the case of KfW; that the GKA Facility is a direct guarantee of the Federal Republic of Germany (GKA Guarantee) and has been registered by PwC Deutsche Revision AG and assigned the GKA numbers 6753 and 6851, as certified by the Federal Ministry of Finance of Germany (Bundesministerium der Finanzen) in its letter dated February 12, 2004; and that the GKA Guarantee will cover political risks and extended breach of contract up to US$100,000,000.00 plus interest and will consist of an Extended Political Risk Insurance (PRI) to be provided by the German government through Bundesschuldenverwaltung or the Public Debt Management Agency of the Federal Republic of Germany. In reply, please be informed that Article 11 of the Philippines-Germany tax treaty provides as follows: "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. 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 ". (emphasis supplied) "xxx xxx xxx" In this connection, Article 3(l)(h) of the same treaty provides, viz : "Article 3 GENERAL DEFINITIONS 1. In this Agreement, unless the context otherwise requires: "xxx xxx xxx" h) the term "competent authority" means in the case of the Federal Republic of Germany the Federal Minister of Finance, and in the case of the Republic of the Philippines the Minister of Finance or his authorized representative. "xxx xxx xxx" Based on the aforequoted. provisions, the interest paid to a resident of Germany will be taxed at a preferential rate not exceeding 10 percent if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or in respect of a loan of whatever kind granted by a bank, or public issues of bonds, debentures or similar obligations, and in all other cases, 15 percent of the gross amount of interest. However, if the interest income is derived in respect of a loan made, guaranteed or insured by "Hermes Deckung" or any other government instrumentality of the Federal Republic of Germany as specified and agreed in letters exchanged between the competent authorities of the Contracting States, the interest income shall be exempt from Philippine income tax. For this purpose, the competent authority for the Federal Republic of Germany is its Federal Ministry of Finance. ( BIR Ruling No. ITAD-043-00 dated February 10, 2000 ) Considering that the Federal Ministry of Finance, in its letter dated February 12, 2004, has certified that the subject GKA Facility is a direct guarantee of the Federal Republic of Germany for the purpose of invoking the exemption from withholding tax on interest income accorded under Article 11(4) of the same treaty to benefit the resident German lenders of the GKA Facility, this Office is of the opinion and so holds that the interest payments by SPI to HVB, Dresdner and KfW under the GKA Facility are exempt from Philippine income tax pursuant to Article 11(4) of the Philippines-Germany tax treaty. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the parties herein are concerned. SCETHa Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue