ITAD Ruling No. 092-03

July 3, 2003 ITAD RULING NO. 092-03 RP-Netherlands Art. 11; RP-Singapore Art. 11; RP-Spain Art. 11; RP-Germany Art. 11; RP-France Art. 11; RP-Japan Art. 11 BIR Ruling No. DA-ITAD-97-02; ITAD-128-00 Sycip Salazar Hernandez & Gatmaitan Attorneys-at-Law Office Sycip Law-All Asia Capital Center 105 Paseo de Roxas, Makati City 1226 Metro Manila Attention: Atty. Hector M. de Leon, Jr. and Atty. Ramil E. Bugayong Gentlemen : This refers to your letter dated June 8, 2001 requesting for a ruling confirming your opinion that the interest payments under the Omnibus Credit and Security Agreement (the Agreement) dated August 18, 2000 between CBK Power Company Limited (CBK) and ABB Structured Finance B.V. (ABB), Bayerische Hypo-und Vereinsbank AG (BHV), Dai-chi Kangyo Bank Limited (DKB), Norinchukin Bank (NORINCHUKIN), Sanwa Bank Limited (SANWA) and Tokai Bank, Ltd. (TOKAI), ANZ Singapore Ltd. (ANZ), Banco Santander Central Hispano, S.A. (Banco Santander) and Credit Agricole Indosuez (CAI) are entitled to preferential income tax rates pursuant to the applicable tax treaties. It is represented that CBK is a limited partnership duly organized and existing under and by virtue of the laws of the Philippines; that it is registered under Securities and Exchange Commission (SEC) Company Registration No. A200004027 dated October 9, 2001, with business address at 29th Floor, LKG Tower, 6801 Ayala Avenue, Makati City; that CBK is registered with the Board of Investments (BOI) under Certificate of Registration No. 99-016 dated May 6, 1999 as a new Operator of Hydroelectric Power Generating Plants on a Pioneer Status pursuant to the Omnibus Investment Code of 1987; that ABB is a financing institution domiciled in the Netherlands per certification issued by the Dutch Tax Office in Rotterdam, The Netherlands; that ABB is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 30, 2001; that BHV is a bank/financial institution domiciled in Germany per certification issued by the German tax authority; that BHV is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated May 3, 2001; that both DKB and NORINCHUKIN are residents of Japan as evidenced by the certificate of residence issued by the tax authorities of Japan-Kojimachi Tax Office; that DKB and NORINCHUKIN are not registered either as corporations or as partnerships and have not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 30, 2001; that while DKB has a representative office in the Philippines, such representative office is not authorized to engage in banking activities in the Philippines for DKB; that both SANWA and TOKAI are residents of Japan as evidenced by the certificate of residence respectively issued by Osaka tax office and Nagoyanaka tax office; that SANWA and TOKAI are not registered either as corporations or as partnerships and have not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated May 7, 2001; that while SANWA has a representative office in the Philippines, such representative office is not authorized to engage in banking activities in the Philippines for SANWA; that ANZ is a resident of Singapore as set out in the Certificate of Incorporation of Public Company; that Banco Santander is a resident of Resident of Spain as set out in Certificado de Residencia Fiscal en Espaa from Agencia Tributaria; that CAI is a resident of France as set out in a residence certificate issued by Centre Des Impots De Courbevoie Fiscalite Des Enterprises; that ANZ, Banco Santander, and CAI are not registered either as corporations or as partnerships and have not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated May 3, 2001 for ANZ and Banco Santader and April 30, 2001 for CAI; that all the above-mentioned banks are parties as lenders to the Omnibus Credit and Security Agreement (the Agreement) dated August 18, 2000, as amended; that the Agreement provides for three type of loans namely the PRI Facility (PRI Loan), the Debt Reserve Facility (Debt Service Loan), and the Performance Security Facility (Performance Loan); that pursuant to the Agreement, CBK will pay interest on the loans to its lenders from time to time; and that as of February 2001, CBK has availed of PRI Loan only, the first drawdown of which occurred sometime in February 2001. In reply, please be informed of the pertinent provisions of Article 11 (Interest) of the Philippines' tax treaties with Netherlands, Germany, Japan, Singapore, Spain, France, to wit: RP-Netherlands tax treaty: "1. Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 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 percent 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 percent of the gross amount of the interest in all other cases. xxx xxx xxx" RP-Germany tax treaty: "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" RP-Japan tax treaty: "1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting 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 of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 percent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. xxx xxx xxx" RP-Singapore tax treaty: "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 if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. xxx xxx xxx" RP-Spain tax treaty: "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 percent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) in respect of issues of bonds, debentures or similar obligations offered to the general public. b) 15 percent of the gross amount of such interest in all other cases. xxx xxx xxx" RP-France tax treaty: "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 if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 15 per cent of the amount of the interest. 3. Notwithstanding the provisions of paragraph 2, a) Interest arising in a Contracting State and paid to a resident of the other Contracting State in respect of a bond, debenture or other similar obligation of the government of the first-mentioned Contracting State or a political subdivision or local authority thereof shall, provided that the interest is beneficially owned by a resident of the other Contracting State, be taxable only in that other Contracting State; xxx xxx xxx" Based on the aforequoted provisions, interest payments by a Philippine resident to residents of the Netherlands, Germany and Japan who are the beneficial owner of the interests, will be taxed at a preferential rate of not exceeding ten per cent (10%) if the interest is paid in respect of any loan of whatever kind granted by a bank or any other financial institution, or if the company paying the interest, being the resident of the Philippines, is registered with the Board of Investments and is engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines. On the other hand, interest payments by a Philippine resident to residents of Singapore, Spain and France who are the beneficial owner of the interests will be taxed at a preferential rate of not exceeding 15 per cent of the gross amount of interest. AaCcST Such being the case and since CBK is engaged in preferred pioneer areas of investment, this Office is of the opinion and so holds that the interest payments to be made by CBK to ABB Structured Finance B.V., Bayerische Hypo-und Vereinsbank AG, Dai-chi Kangyo Bank Limited, Norinchukin Bank, Sanwa Bank Limited and Tokai Bank, Ltd. are subject to Philippine final withholding tax rate of 10 per cent of the gross amount of interest pursuant to Article 11 of the Philippines' tax treaties with the Netherlands, Germany and Japan. On the other hand, the interest income to be remitted by CBK to ANZ, Banco Santander and CAI relative to the subject loan agreement shall be subject to the preferential rate of 15% Philippine income tax based on the gross amount of interest pursuant to Article 11 of the Philippines' tax treaties with Singapore, Spain and France. (BIR Ruling No. DA-ITAD-97-02) Finally, the Loan Agreement executed by CBK and the aforementioned financial institutions shall be subject to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. (BIR Ruling No. ITAD-128-00 dated September 1, 2000) This ruling is being issued on the basis of foregoing 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service