June 13, 1995

BIR RULING NO. 085-95

R.A. 7227 000-00 085-95 SYCIP GORRES VELAYO & CO. 6760 Ayala Avenue Makati, Metro Manila Attention : Atty. C . P . Noel Gentlemen: This refers to your letter dated September 20, 1994 stating that your client, Subic Power Corporation (SPC) is registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise under R.A. 7227 (otherwise known as the Bases Conversion and Development Act) to engage in the business of generation and sale of electric power; that the SBMA issued to SPC Certificate of Registration No. 93-0007; that SPC has a contract with the National Power Corporation to develop, construct and operate a 108 megawatt power station in the Subic Bay Freeport, Olongapo City; that the estimated cost of the power station project is about U.S. $143.0 million; that to finance the project, SPC has undertaken a "Rule 144 A" offering in the U.S. and has issued notes under an Indenture Agreement; that the notes are direct obligation of SPC and are floated in the U.S.; that under the Indenture Agreement, SPC will pay interest to the holders of the notes without any withholding or deduction for any taxes imposed or levied by the Philippine Government; that the said tax assumption is not only in conformity with the international banking practice on foreign loans, but also primarily as a consideration for the credit and in lieu of additional interest that would have been imposed had SPC not agreed to assume the Philippine withholding tax; that therefore, the Philippine withholding tax on the interest is passed on to SPC and it assumes the payment of the tax; that SPC bears the burden of and becomes directly liable to the tax otherwise due from the noteholders; that the Philippine withholding tax on the interest becomes SPC's additional tax liability, and an addition to its financing charges associated in the construction of the power plant.
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You now request confirmation of your opinions as follows: 1) Subic Power Corporation should withhold 5% as final withholding tax on the interest income remitted to U.S. bondholders in connection with its "Rule 144 A" offering in the U.S.; The assumed 5% final withholding tax is considered additional financing charges of Subic Power Corporation; and The withholding tax base for purposes of applying the 5% final withholding tax is the total amount of income to be remitted without grossing up the 5% final withholding tax due thereon.

2) 3)

In reply, please be informed as follows: 1. In Suggestion 5 of Revenue Memorandum Circular No. 46-77, this Bureau has recognized and stated that it is aware of the market convention that the local borrower assumes the tax on the creditor's income in a foreign loan agreement. Thus, the Bureau adopted measures for local institutions to be at par with non-resident creditors. In this connection, a withholding agent is held to be directly and independently liable for the tax that, by law, it should withhold. (Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation and the Court of Tax Appeals, G.R. 66838, December 2, 1994). Pursuant to Republic Act No. 7227, Subic Bay Freeport (SBF) Enterprises, such as SPC, are subject to the maximum tax rate of 5% in lieu of all other national or local taxes. The 5% tax of SBF Enterprises is a commutation tax which effectively accords the grantee exemption from all other taxes. (Philippine Air Lines vs. Commissioner of Internal Revenue, CTA Case No. 5 dated February 8, 1956; PNRC vs. CIR, G.R. 10045, 34 Phil 401). Such being the case, your opinion that SPC should withhold 5% as final withholding tax on the interest income remitted to U.S. bondholders in connection with its "Rule 144A" offering in the U.S., is hereby confirmed. This Bureau similarly recognizes that when an enterprise assumes payment of taxes withheld and due from a foreign lender-remittee on interest payments of foreign loans, the taxes assumed by the registered enterprise represent necessary and ordinary expenses
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2.

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incurred by the enterprise; hence, deductible from its gross income. [Section 2(b), Revenue Memorandum Circular No. 13-80 dated April 10, 1980]. Therefore, your opinion that the 5% final withholding tax assumed by Subic Power Corporation under the circumstances described above should be considered its additional financing charges is hereby confirmed. 3. The assumption of the tax constitutes an additional income of the non-resident creditor-bondholders, which in turn should be subject to tax. (Old Colony Trust Co. vs. Commissioner, 279 U.S. 716). Thus, the tax base should be grossed-up by adding to the interest income payments the amount of tax assumed.
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Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue

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CD Technologies Asia, Inc.

Taxation 2005