ITAD Ruling No. 052-05

June 9, 2005 ITAD RULING NO. 052-05 Article 11 of the Philippines-Switzerland tax treaty BIR Ruling No. DA-ITAD-26-04 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: J.A. Osana Tax Division Gentlemen : This refers to your dated March 29, 2005, on behalf of your client, Chevron Texaco Malampaya LLC-Philippine Branch (CTM LLC-Phil) formerly Texaco Philippines, Inc.-Philippine Branch, requesting confirmation that the interest payments on a loan made by CTM LLC-Phil to ChevronTexaco Overseas Finance GmbH (CTOF), formerly Texaco Overseas Holdings Inc., and its branch in Bermuda shall be subject to a preferential withholding tax rate of 10%, pursuant to Article 11(2) of the Philippines-Switzerland tax treaty. It is represented that CTOF is a non-resident corporation organized and existing under the laws of Switzerland with principal address at SH Services GmbH Stampfenbachstrasse 52 Zurich, Switzerland 8006; that CTOF has a branch in Bermuda, but per Certification issued by the Securities and Exchange Commission dated December 15, 2004, CTOF and The Bermuda Branch are not licensed to engage in trade or business in the Philippines; that CTM LLC-Phil on the other hand, is a corporation organized and existing under the laws of the Philippines with principal address at 8th Floor, Asian Star Bldg., Asean Drive, Filinvest Corp. City, Alabang Muntinlupa; that on April 3, 2000, CTM LLC-Phil, then still known as Texaco Overseas Holdings, Inc. Philippine Branch, obtained a loan facility from lender Texaco Overseas Holdings, Inc., a corporation organized and existing under the laws of Delaware, USA, in the aggregate amount of US$1,120,000,000 payable in quarterly installments and with interest of LIBOR + 3% per annum (this loan facility is hereinafter referred to as " Malampaya Loan 1 "); that on March 15, 2002, CTDX ApS, a corporation organized and existing under the laws of Denmark, became the successor-in-interest of Texaco Overseas Holdings, Inc. with respect to Malampaya Loan 1, and acquired all the rights and obligations of the CTOF under the Malampaya Loan 1; that in December 2003, CTM LLC-Phil obtained another loan facility from CTDX ApS for the amount of US$136,000,000 payable in monthly installments and with interest of LIBOR + 5.5% per annum (this loan facility is hereinafter referred to as " Malampaya Loan 2 "); that on October 20, 2004, CTDX ApS and CTOF entered into an Assignment Agreement whereby CTDX ApS transferred and assigned all of its undivided its undivided right and interest in and to the Malampaya Loan 1 and the Malampaya Loan 2 to CTOF; that during the initial months (October, November and December, 2004) after CTOF acquired the two loans, the monitoring, reporting and other administrative matters related to the loans were taken care of by the Bermuda Branch of CTOF, thus, during the said period, CTM LLC-Phil remitted payment for the principal and interest of the Malampaya Loan 1 and Malampaya Loan 2 to the Bermuda Branch of CTOF; that in January 2005, as a result of corporate restructuring, CTOF discontinued its use of the Bermuda Branch and hence, CTM LLC-Phil started remitting the principal and interest payment for the two loans to CTOF account with a bank in New York. In reply, please be informed that Article 11 of the Philippines-Switzerland tax treaty provides, viz : "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 also be taxed in the Contracting 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 10 per cent of the gross amount of interest . (Underscoring supplied) "3. The term 'interest' as used in this Article 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 laws 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" Based on the aforequoted provisions, interest arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a preferential rate not exceeding ten percent (10%) of the gross amount of the interest if the recipient is the beneficial owner thereof. Considering that CTOF acquired all of the undivided rights and interests of CTDX in the Malampaya loans 1 and 2, by virtue of the Assignment Agreement dated October 20, 2004, CTOF is deemed the beneficial owner of the interest arising from the said loans. Such being the case, this Office is of the opinion and so holds that the interest payments by CTM LLC-Phil to CTOF from October 20, 2004 are subject to a preferential rate of ten percent (10%) pursuant to Article 11 of the Philippines-Switzerland tax treaty. (BIR Ruling No. DA-ITAD-26-04 dated March 19, 2004) IHCESD This ruling is issued on the basis of the facts as represented. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service