ITAD Ruling No. 179-02

October 15, 2002 ITAD RULING NO. 179-02 Article IV, Protocol, RP-Belgium Article 11, RP-France Article 11, RP-Japan Articles 10, RP-UK Sec. 180, NIRC BIR Ruling No. DA-ITAD-78-01; BIR Ruling No. DA-ITAD-94-02; BIR Ruling No. DA-ITAD-97-02 Puno and Puno Law Offices 12th Floor East Tower, Philippine Stock Exchange Center Exchange Road, Ortigas Center City of Pasig 1605 Attention: Atty. Maria Cristina M.F. Villanueva Gentlemen : This refers to your letter dated July 24, 2000 on behalf of your client, MAYNILAD WATER SERVICES, INC. (Maynilad Water), requesting confirmation that the applicable withholding tax rates on the interest paid and to be paid in the future by Maynilad Water to the following lenders under its Bridge Loan, are as follows: 1) to BARCLAY BANK PLC (Barclay) fifteen per cent (15%) pursuant to the RP-UK tax treaty; 2) to FORTIS BANK NV-SA (Fortis) ten per cent (10%) pursuant to the RP-Belgium tax treaty, as amended by the Protocol to the 1976 Treaty; 3) to PARIBAS (Paribas) fifteen per cent (15%) pursuant to the RP-France tax treaty; and 4) to THE TOKAI BANK, LIMITED (Tokai) ten per cent (10%) pursuant to the RP-Japan tax treaty. It is represented that Maynilad Water is a corporation duly organized and existing under the Philippine laws, registered with the Board of Investments (BOI) on a preferred pioneer status per Certificate of Registration No. 97-201, dated January 13, 1998; that it is the joint venture company of Benpres Holdings Corporation and Suez Lyonnaise des Eaux S.A.; that it is the Concessionaire for the West Service Area of the Metropolitan Waterworks and Sewerage System (MWSS) pursuant to a concession agreement between Maynilad Water and MWSS (the "Concession Agreement") dated February 21, 1997; that in order to meet its obligations under the Concession Agreement, Maynilad Water executed on March 10, 2000 a US$100 Million Bridge Loan Agreement with the following international commercial banks: a) Barclay, a foreign corporation duly organized and existing under the laws of United Kingdom and was licensed to do business in the Philippines to operate an Offshore Banking Unit on August 23, 1977 per certification issued by the Securities and Exchange Commission (SEC) dated August 2, 2000; b) Fortis, a nonresident foreign corporation duly organized and existing under the laws of Belgium and not registered as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the SEC dated July 24, 2000; c) Paribas, a nonresident foreign corporation duly organized and existing under the laws of France and licensed to establish regional/area headquarters in the Philippines per certification issued by the SEC dated July 24, 2000; and d) the Tokai Bank Limited of Japan, a nonresident foreign corporation duly organized and existing under the laws of Japan and licensed to establish a regional office in the Philippines under P.D. 218 per certification issued by the SEC dated August 9, 2000; that the above-mentioned lender banks are not stockholders of Maynilad Water. Based on the above representations, it is your opinion that pursuant to Article 10 of the RP-UK tax treaty, Article IV of the Protocol amending the RP-Belgium tax treaty, Article 11 of the RP-France tax treaty and Article 11 of the RP-Japan tax treaty, respectively, the interest paid and to be paid by Maynilad Water to the following Bridge Loan lenders are as follows: a) Barclay 15% of the gross amount of interest; b) Fortis 10% of the gross amount of interest; c) Paribas 15% of the gross amount of interest; and, d) Tokai 10% of the gross amount of interest. In reply, please be informed that Article 10 of the RP-UK tax treaty provides, viz : RP-UK "Article 10 "Interest "1. Interest arising in a Contracting State which is derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. "2. However, such interest may also 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 15 per cent of the gross amount of the interest. (Emphasis supplied) "xxx xxx xxx "5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, including premiums and prizes attaching to such securities, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other 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. "6. The provisions of paragraphs (1), (2) and (3) of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on a trade or business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State professional 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 7 or 13, as the case may be, shall apply. "xxx xxx xxx" Based on the afore-cited provisions, the subject interest payments of Maynilad to Barclay may be taxed at the preferential rate of 15% unless Barclay has a permanent establishment or fixed base in the Philippines to which said interest income is effectively connected. cCaIET Considering that the said interest payments, as herein represented, are not effectively connected to its Offshore Banking Unit (OBU) and that the said OBU of Barclay has no participation whatsoever in the herein Bridge Loan as shown in the Loan Agreement itself and the proof of inward remittance submitted, therefore, this Office is of the opinion and so holds that the interest payments of Maynilad Water to Barclay are subject to the preferential tax rate of 15% based on the gross amount of interest, pursuant to Article 10 of the RP-UK tax treaty. (BIR Ruling No. DA-ITAD-78-01) Moreover, pursuant to Article IV of the Protocol amending the RP-Belgium tax treaty, Article 11 of the RP-France tax treaty and Article 11 of the RP-Japan tax treaty which respectively provides, viz : PROTOCOL AMENDING RP-BELGIUM "ARTICLE IV "Article 11 of the Agreement is substituted with the following: "Article 11 "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 also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the interest. (Emphasis supplied) "xxx xxx xxx "4. The term 'interest' as used in this Article 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 or taxed in the same way as income from money lent by the taxation law of the State in which the income arises, including interest on deferred payments. However, the term 'interest' shall not include for the purpose of this Article interest regarded as dividends under paragraph 3 of Article 10. "xxx xxx xxx" RP-FRANCE "Article 11 "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 per cent of the amount of the interest. (Emphasis supplied) "xxx xxx xxx "4. The term 'interest' as used in this Article 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 bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. "xxx xxx xxx" RP-JAPAN "Article 11 "(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 per cent 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 . (Emphasis supplied) "xxx xxx xxx "5. The term 'interest' as used in this Article 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. "xxx xxx xxx" Fortis, Paribas and Tokai Bank, all of which do not have permanent establishment in the Philippines to which the interest received and to be received from Maynilad Water could be attributed to, and considering further that Maynilad Water is a BOI-registered enterprise of a preferred pioneer status, this Office confirms your opinion as it hereby holds that the interest paid and to be paid by Maynilad Water to the remaining Bridge Loan lenders are subject to the following tax rates: a) Fortis Bank 10% of the gross amount of interest pursuant to the Protocol amending RP-Belgium tax treaty; b) Paribas 15% of the gross amount of interest pursuant to the RP-France tax treaty; and c) The Tokai Bank, Limited 10% of the gross amount of interest pursuant to the RP-Japan tax treaty. (BIR Ruling No. DA-ITAD-94-02; BIR Ruling No. DA-ITAD-97-02) Finally, the Bridge Loan Agreement is subject to documentary stamp tax under Section 180 of the Tax Code of 1997. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service