ITAD Ruling No. 174-00

November 14, 2000 ITAD RULING NO. 174-00 RP-US Tax Treaty Art. 12 33-00 52-98 Bacnotan Consolidated Industries, Inc. 4th Floor, PHINMA Building 166 Salcedo Street, Legaspi Village Makati City Attention: Mr . Eduardo Sahagun Sr. Vice Pres.-Asst. Treasurer Gentlemen : This refers to your letter dated July 4, 2000, requesting confirmation that the interest paid by Bacnotan Consolidated Industries, Inc. (BCII) on its long-term convertible bonds to United States residents is subject to 10% preferential tax rate pursuant to the RP-US Tax Treaty. It is represented that BCII is a corporation duly organized and existing under the laws of the Philippines; that BCII entered into an "Indenture" with The Bank of New York, a foreign corporation duly organized and existing under the laws of the State of New York, dated June 21, 1994, with the latter as trustee and issued a 5% convertible bonds due year 2004 in the amount of US$55,000,000.00; that as certified by the Bank of New York, the participants and beneficial holders of the bonds are the following institutions: (a) Boston Safe Deposits and Trust Company; (b) Chase Manhattan Bank; (c) Brown Brothers Harriman & Co.; (d) Salomon Smith Barney, Inc.; and (e) Citibank N.A. (referred to herein as the Primary Participants); that all of the Primary Participants are considered residents of the United States as certified by the Department of Treasury, Internal Revenue Service Philadelphia; that all of the Primary Participants, except for Citibank N.A. and Chase Manhattan Bank, are not registered to do business in the Philippines as evidenced by the Securities and Exchange Commission dated May 31, 2000; and that the interests derived by Citibank N.A. and Chase Manhattan Bank from the participation of the bonds are not effectively connected with their Philippine Branch. In reply, please be informed that Article 12 of the RP-US Tax Treaty provides as follows: "Article 12 " INTEREST "1. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. HaEcAC "2. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. "3. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of such interest. "4. Notwithstanding paragraphs 1, 2 and 3, interest derived by "a) One of the Contracting States, or an instrumentality thereof (including the Central Bank of the Philippines, the Federal Reserve Banks of the United States, the Export-Import Bank of the United States, the Overseas Private Investment Corporation of the United States and such other institutions of either Contracting States as the competent authorities of both Contracting States may determine by mutual agreement), or "b) A resident of one of the Contracting States with respect to debt obligations guaranteed or insured by that Contracting State or an instrumentality thereof, shall be exempt from tax by the other Contracting State. "5. Paragraphs 2, 3, and 4 shall not apply if the recipient of interest from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. xxx xxx xxx "7. The term "interest" as used in this Convention 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 law of the Contracting State in which the income arises, including interest on deferred payment sales." TESICD Based on the foregoing paragraphs, interest income derived by US residents in the Philippines may be taxed by both United States and Philippines. However, the Philippines may tax the interest payments on the convertible bonds issued by a Philippine company to a US company at the rate not exceeding 10% of the gross amount of such interest. If the US company carries on business through a permanent establishment situated in the Philippines, the interest paid thereto must not be effectively connected with such permanent establishment to be entitled to the preferential tax rate. Such being the case, your opinion is hereby confirmed that the interest payments on the convertible bonds issued by Bacnotan Consolidated Industries, Inc. in favor of the Primary Participants namely: Boston Safe Deposits and Trust Company, Chase Manhattan Bank, Brown Brothers Harriman & Co., Salomon Smith Barney, Inc., and Citibank N.A., shall be subject to the preferential tax rate of 10% of the gross amount of such interest. Furthermore, the bonds shall be subject to the documentary stamp tax pursuant to Section 180 of the Tax Code, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group