ITAD Ruling No. 168-02

September 30, 2002 ITAD RULING NO. 168-02 Article 11, RP-Netherlands BIR Ruling No. ITAD 25-02 Apo Cement Corporation 25/F Petron Mega Plaza 358 Sen. Gil J. Puyat Avenue Makati City, Philippines Attention: Mr. Roman V. Azanza Special Assistant to the VP-Finance & Administration Gentlemen : This refers to your application for tax treaty relief filed on March 1, 2002, requesting confirmation of your opinion that the interest payments of APO Cement Corporation (APO) to Cemex Netherlands B.V. (CEMEX) are subject to the preferential tax rate of 10%, pursuant to Article 11(2)(a)(ii) of the RP-Netherlands tax treaty. It is represented that CEMEX is a corporation organized and existing as a financial institution under the laws of the Netherlands with principal office at "Rivierstaete" Building Amsteldijk 166, 1079 L.H. Amsterdam, The Netherlands; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification dated May 29, 2002 issued by the Securities and Exchange Commission; that APO is a corporation organized and existing under the laws of the Philippines and is primarily engaged in the business of manufacturing and selling of cement with principal office address at 25th Floor, Petron Megaplaza, 358 Sen. Gil J. Puyat Avenue, Makati City; that on December 15, 1999, a Loan Agreement was entered into by and between APO and CEMEX, whereby the latter granted the former a loan in the aggregate amount of US$20,000,000 (Twenty Million United States Dollars) payable within a period of two (2) years from December 15, 1999, unless the agreement is extended by mutual consent; that APO is required to pay interest at a rate of three months LIBOR plus 2% for the first and any subsequent period of three months; and that the said interest shall be payable initially on December 15, 2001 unless the parties agree otherwise in writing. In reply, please be informed that Article 11 of the RP-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. CHIEDS "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. "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 all 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. Based on the foregoing, the interest income received by the beneficial owner of the interest who is a resident of the Netherlands and does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding ten percent (10%) of the gross amount of interest if, among others, the loan (of whatever kind) was granted by a bank or any other financial institution. Such being the case, the interest income to be remitted by APO to CEMEX, a registered financial institution, relative to the aforementioned Loan Agreement shall be subject to the preferential tax rate of ten percent (10%) of the gross amount of the interest, pursuant to Article 11(2)(a)(ii) of the RP-Netherlands tax treaty. ( BIR Ruling No. ITAD 25-02 dated March 6, 2002 ) Moreover, the Loan Agreement executed by and between them shall be subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue Code of 1997. This ruling is issued based on 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 parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service