ITAD Ruling No. 179-00

November 15, 2000 ITAD RULING NO. 179-00 Art. 11 RP-Finland Tax Treaty Quisumbing Torres Attorneys at Law 11th Floor, Pacific Star Bldg. Makati Ave. cor. Sen. Gil J. Puyat Ave. Makati City Attention: Atty . Jose R . Sandejas and Atty . Dennis G . Dimagiba Gentlemen : This refers to your letters dated November 10, 1999 and February 11, 2000 requesting for a ruling to the effect that the interest payments to be received by Leonia Corporate Bank plc (Leonia) from Smart Communications, Inc. (Smart) shall be exempt from Philippine tax pursuant to RP-Finland Tax Treaty. It is represented that Leonia is a non-resident foreign corporation duly organized and existing under the laws of the Republic of Finland; that Leonia is formerly known as Suomen Vientiluotto Oy (in English, Finnish Export Credit Ltd); that the company name Suomen Vientiluotto Oy, was subsequently changed to Suomen Vientiluotto Oyj (in English, Finnish Export Credit plc) registered with the trade register on December 15, 1997 and to Leonia Yrityspankki Oyj (in English, Leonia Corporate Bank plc), and Leonia Corporate Bank Oyj (in English, Leonia Corporate Bank plc) registered with the trade register on June 8, 1998 and December 29, 1998, respectively; that Leonia is not registered as corporation/partnership in the Philippines per certification dated November 4, 1999 issued by the Securities and Exchange Commission; that Smart is a corporation organized and existing under the laws of the Philippines; that on November 5, 1999, a Loan Agreement was entered into by and between Leonia and Smart whereby Leonia granted a loan to Smart in the amount of US$32,000,000 term facility; that the purpose of the loan is to finance, among others, the design, procurement, installation, commissioning and operation of approximately 260 based stations and related equipment for Smart's GSM digital cellular telephone system ("Phase 1"); that the rate of interest applicable to the loan or the relevant part thereof for each Interest Period shall be the rate per annum determined by the Lender to be (i) the aggregate of London Interbank Offering Rate for the Interest Period and the Applicable Margin (defined variedly as 1.138%, 1.377% or 1.415% depending on the date of interest payment) or (ii) the aggregate of the CIRR Fixed rate (5.18%) and the Applicable Margin; that Leonia and Smart will execute two other loan agreements (i.e, phases 2 and 3 of the loan arrangement) which Leonia will extend similar credits to Smart for the financing of the design, procurement, installation, commissioning and operation of additional base stations and related equipment for Smart's GSM digital telephone system; that these two other loan agreements between Leonia and Smart will adopt substantially the same terms and conditions as the loan agreement executed by Leonia and Smart on November 5, 1999; that Phases 2 and 3 of the loan arrangement will involve the same parties as that of phase 1 of the loan agreement; In reply, please be informed that Article 11 of the RP-Finland Tax Treaty provides as follows: 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 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 percent of the gross amount of the interest. xxx xxx xxx 7. Notwithstanding the provisions of paragraph 2. xxx xxx xxx" b) interest arising in Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other Contracting State if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Central Bank of the Philippines or the Finnish Export Credit Limited." CASIEa Such being the case, and since the Phase 1 term loan facility was extended (and the proposed Phases 2 and 3 term loan facilities will be extended) by Leonia, formerly, Finnish Export Credit Ltd., to Smart, the interest income to be remitted to Leonia relative to the aforementioned loan agreements shall be exempt from Philippine tax pursuant to Article 11(7)(b) of the RP-Finland Tax Treaty. However, the Loan Agreement executed by and between them shall be subjected to the documentary stamp tax imposed under Section 180 of the Tax Code of 1997. 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. DHcTaE Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue