ITAD Ruling No. 107-05

September 21, 2005 ITAD RULING NO. 107-05 Financial Protocol between the Government of the French Republic and the Republic of the Philippines BIR Ruling No. DA-503-2004 Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower, 122 Valero St., Salcedo Village., 1227 Makati City Attention: Atty. J. Gregson A. Castillo Gentleman : This refers to your letter dated September 12, 2005 on behalf of your clients ETDE S.A. ("ETDE") and PARIS-MANILA TECHNOLOGY CORPORATION ("PAMATEC") requesting confirmation that, pursuant to Article 8 of the Financial Protocol Between the Government of the French Republic and the Government of the Republic of the Philippines , dated November 10, 2004 ("Financial Protocol"): 1. Neither ETDE, PAMATEC, nor any consortium formed by the two entities, shall be liable to pay income tax in the Philippines on profits derived from the proposed " Contract for Engineering, Procurement, Sales and Construction for the Electrification of 18,000 Households in 128 Barangays in the Province of Masbate under the Philippine Rural Electrification Service (PRES) Project " (the "Contract") with the National Power Corporation ("NPC"), which project shall be entirely funded by loans granted under the Financial Protocol; 2. Neither ETDE, PAMATEC, nor any consortium formed by the two entities, shall be liable to pay value-added tax ("VAT") in the Philippines on its sales receipts under the Contract; and, should VAT be due, such VAT shall be passed on and billed to NPC; and that any input VAT passed on to ETDE, PAMATEC, or any consortium formed by the two entities by domestic suppliers of goods and services in the implementation of the project, shall also be passed on and billed to NPC; 3. No form of withholding taxes, whether income tax or VAT, or whether final or creditable, shall be deducted from the payments made under the Contract to ETDE, PAMATEC, or any consortium formed by the two entities, which payments are to be made out of the proceeds of loans granted under the Financial Protocol. It is represented that ETDE is a nonresident foreign corporation organized and existing under the laws of France, while PAMATEC is a domestic corporation; that through a collaboration among the Department of Energy ("DOE"), ETDE and PAMATEC, the PRES project was conceptualized to provide adequate and reliable energy services to approximately 18,000 households in 128 barangays in the Province of Masbate, to be financed entirely through the support from the French government; that on October 16, 2003, the PRES project was approved by the National Economic and Development Authority-Investment Coordination Committee ("NEDA-ICC"); that on November 10, 2004, the Financial Protocol was signed by Ambassadress H. E. Renee Veyret, for the French government, and then Secretary of Finance, Hon. Juanita D. Amatong, for the Philippine government; that Article 1 of the Financial Protocol expressly states that "the French Government grants the Government of the Republic of the Philippines financial support designed for the execution of the 'Philippine Rural Electrification Service Project' on the Island of Masbate, a project included in the economic development priorities of the Republic of the Philippines;" that under the Financial Protocol, the Project is eligible for financing up to the amount of EUR22.5 million, consisting of: (a) a treasury loan from the French Government in an amount not to exceed EUR13,500,000; and (b) credits guaranteed by the French credit insurance company (COFACE) in an amount not to exceed EUR9,000,000. CAaDTH It is also represented that the executing entity to be designated by the Government of the Republic of the Philippines to receive the French financial support, in accordance with Article 4 of the Financial Protocol, is the NPC, whose authority to negotiate the Contract was approved and affirmed by its Board on November 18, 2004 and December 14, 2004, respectively; that on April 12, 2005, the Department of Justice issued its opinion confirming that direct negotiations on the Contract are proper and in accordance with Republic Act No. 9184; * that under the Contract, ETDE and PAMATEC shall furnish all superintendence, labor, materials, supplies, tools and equipment for the electrification of 18,000 households in 128 barangays in the Province of Masbate; that ETDE shall perform all offshore works, such as the procurement and supply from abroad of all equipment, supplies and materials to be imported by NPC, whereas PAMATEC shall perform all onshore works, such as local supply, installation and construction in the Philippines. In reply, please be informed as follows: Article 8 of the Financial Protocol states that: "ARTICLE 8 TAXATION " The financial support related to the execution of the present Protocol cannot be used for the payment of any tax or duty in the Republic of the Philippines . The reimbursement of principal and the payment of interest, fees and accessories linked to the execution of the present Protocol shall be paid net of any taxation in the Republic of the Philippines. "For the purpose to reserve the financial resources provided for in the present protocol for the development of the Republic of the Philippines, it is agreed that the contracts ascribed in Articles 6 and 7, the supply of goods and services , including technical assistance by French companies in the framework of the present protocol, as well as importation, exportation, purchase, utilization or disposal of goods and services contributing to the production of such supplies, shall not be subject to any tax, customs duties, social security taxes or any other levies in the Republic of the Philippines. "Should such levies above-mentioned, whatever their object or nature, be collected according to the Philippine rules with respect to the said operations, then the payment of these levies shall be to the charge of the Philippine buyer ." (Emphasis supplied) Based on the above-quoted provision on " non-utilization " and " tax assumption " of the proceeds of the loan granted under the Financial Protocol, any part of the said loan cannot be used to pay any Philippine tax, customs duties, social security taxes or any other levies. Accordingly, whatever Philippine taxes and duties that may arise in connection with the execution of the PRES Project under the Contract shall be to the charge of the Philippine buyer (NPC in this instance). In view thereof, since payments to be made by NPC, the executing entity, to ETDE and PAMATEC for the offshore and onshore works to be performed under the Contract, and to any consortium to be formed by the ETDE and PAMATEC, would come entirely from the proceeds of the loan under the Financial Protocol, NPC, therefore, cannot withhold any Philippine creditable or final income tax and value-added tax from the said payments. (BIR Ruling No. DA-503-2004 dated September 24, 2004) Consequently, NPC, being the designated executing entity, shall be made to assume whatever taxes are due in connection with the implementation of the PRES Project under the Contract. Finally, pursuant to the above-quoted " non-utilization " and " tax assumption " of the proceeds of the loan under Article 8 of the Financial Protocol, NPC cannot withhold VAT from its payments to ETDE, PAMATEC or to any consortium formed by the two entities for the rendition of services in the implementation of the PRES Project under the Contract. Hence, any input VAT passed on by domestic suppliers of goods and services in the implementation of the PRES Project to ETDE, PAMATEC and to any consortium formed by the two entities shall also be passed on and billed to NPC. (BIR Ruling No. DA-503-2004 dated September 24, 2004) 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. AIDTSE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes * "Government Procurement Reform Act".