ITAD Ruling No. 032-05

April 13, 2005 ITAD RULING NO. 032-05 Art. 11, Philippines-Netherlands Tax Treaty BIR Ruling No. DA-ITAD 123-02 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B. Cabrera Partner, Tax Services Gentleman : This refers to your letter dated November 8, 2004 requesting confirmation of your opinion that the interest payments of El Paso Philippines Energy Company, Inc. (EPPECI) to EPEC Nederland Holding B.V. (ENHBV) are subject to the preferential tax rate of fifteen percent (15%) pursuant to Article 11 of the Philippines-Netherlands tax treaty. It is represented that ENHBV is a nonresident foreign corporation duly organized and existing under the laws of the Netherlands with principal office address at Koningslaan 34, 1075 AD Amsterdam; that ENHBV is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on October 11, 2004; that EPPECI, on the other hand, is a domestic company organized and existing under the laws of the Philippines with principal office at 20th Floor OMM-CITRA Cond. San Miguel Avenue, Pasig City; that it is established primarily to carry on the general business of generating, transmitting and/or distributing viable sources of power, work for lighting and power purposes and wholesale of the electric power to any power corporation, public electric utilities and electric cooperatives; that it is a wholly owned subsidiary of ENHBV; that on June 30, 2004, EPPECI executed the Intercompany Master Note for Multiple Advances Note Number N427N510 (Promissory Note) in favor of ENHBV; that pursuant to said Promissory Note, ENHBV granted EPPECI a revolving credit not to exceed One Hundred Million United States Dollars (U.S. $100,000,000.00) and EPPECI promised to pay ENHBV the outstanding principal with the interests payable quarterly not later than twenty days following the end of each quarter at the El Paso Corporation's "Monthly Weighted Average Cost Rate" plus of 1/4% of 1% accrued daily on the amount of the outstanding principal. In reply, please be informed that Article 11 of the Philippines-Netherlands tax treaty provides as follows: "ARTICLE 11 Interest "1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. TCaADS "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: (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 any other financial institution, (iii) in respect of public issues of bonds, debentures or similar obligations. b) 15 per cent of the gross amount of the interest in all other cases. "3. . . . "4. . . . "5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. "xxx xxx xxx" Interest is generally taken to mean remuneration on money lent, being remuneration coining within the category of "income from movable capital." The term designates in general, income from debt-claims of every kind, whether or not secured by mortgage. The term "debt-claims of every kind," obviously embraces cash deposits and security in the form of money, as well as government securities, and bonds and debentures, although the latter three are specially mentioned because of their importance and certain peculiarities that they may present. (OECD Model Tax Convention) As can be gleaned from the foregoing, EPPECI's interest payments to ENHBV do not fall under the instances enumerated in Article 11 paragraph 2(a) which is subject to the withholding tax rate of 10% since the interests to be paid by EPPECI are not in connection with any sale on credit of any industrial, commercial or scientific equipment or paid on any loan of whatever kind granted by a bank, or any other financial institution, or paid in respect of public issues of bonds, debentures or similar obligations. Therefore, interest payments by EPPECI to ENHBV are subject to withholding tax rate of 15% pursuant to paragraph 2(b) of the said Article. (BIR Ruling No. DA-ITAD 123-02) Moreover, the Promissory Notes executed between EPPECI and ENHBV shall be subject to the documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997, as amended. This ruling is issued on the basis of the 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. aESICD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group