12 FEBRUARY NEW ZEALAND GAZETTE

Inland Revenue

Tax Administration Act 1994

Determination S8: Issue of TC Finance Convertible Capital Notes Denominated in United States Dollars Convertible at the Option of the Issuer

This determination may be cited as “Determination S8: Issue of TC Finance Convertible Capital Notes Denominated in United States Dollars Convertible at the Option of the Issuer”.

1. Explanation

(which does not form part of the determination).

(1) The Capital Notes, to be issued by TC Finance on the terms and conditions set out in the US Indenture, constitute a financial arrangement or series of financial arrangements.

(2) Each Capital Note evidences that the Noteholder has provided money to TC Finance. Subject to the terms of the Capital Note, this money is repayable at a future date in either cash or Telecom Shares or ADRs. Where Capital Notes are redeemed by an issue of Telecom Shares or ADRs, the number of shares or ADRs issued will be calculated in accordance with section 12.4 of the US Indenture. Coupon Interest Payments may be made between the date of the issue of each Capital Note and the redemption date.

(3) Each Capital Note has a debt and an equity component. The equity component is the option for TC Finance to redeem the Capital Note by procuring the issue of Telecom Shares or ADRs.

(4) Pursuant to section EH 2 of the Income Tax Act 1994, the amount of the gross income deemed to be derived or the expenditure deemed to be incurred by a person in respect of a financial arrangement under the qualified accruals rules shall not include the amount of any income, gain or loss, or expenditure that is solely attributable to an excepted financial arrangement that is part of an anticipated arrangement.

(5) This determination sets out the method for determining the amount of any income, gain or loss, or expenditure, in relation to each Capital Note that is solely attributable to the excepted financial arrangement (the equity) component of the Capital Note. In particular, where Capital Notes are converted into, redeemed or paid by the issue or delivery of, Telecom Shares or Telecom ADRs, the income, gain or loss, or expenditure attributable to the excepted financial arrangement component of the Capital Notes equals any amount by which the value of the Telecom Shares or ADRs (expressed in US Dollars) is above, or below (as the case may be) the Cash Redemption Amount of the Capital Notes that are redeemed for Telecom Shares or ADRs.

(6) The amount of any gross income, or expenditure for any Capital Note under the qualified accrual rules is therefore the same whether the Capital Note is redeemed for Telecom Shares or ADRs or for cash.

(7) This determination does not deal with the spreading of accrual income or expenditure under the qualified accruals rules in relation to the issuing and holding of the Capital Notes. In this regard reference should be made to section EH 1 of the Income Tax Act 1994. Nor does this determination deal with the foreign currency movements in respect of the Capital Note. In this regard reference should again be made to section EH 1 of the Income Tax Act 1994.

2. Reference

(1) This determination is made pursuant to section 90 (1) (g) of the Tax Administration Act 1994.

(2) “Determination G5C: Mandatory Conversion Convertible Notes” does not apply to the Capital Notes because it only applies to mandatory conversion convertible notes. The Capital Notes are not mandatory convertible notes. “Determination G22: Convertible at the Option of the Holder” does not apply to the Capital Notes. The Capital Notes are convertible at the option of the issuer, and denominated in US Dollars.

3. Scope of Determination

(1) This determination shall apply to the Capital Notes issued by TC Finance on the terms and conditions set out in the US Indenture, to the extent that such Capital Notes are denominated in US Dollars, where:

(a) The Capital Notes are subordinated and otherwise have the ranking provided in Article XI of the US Indenture, but rank ahead of TC Finance’s ordinary shares.

(b) Noteholders do not benefit from any capital growth in Telecom’s shares and do not participate in any dividends, or any other distributions made in respect of those shares. No voting rights (in TC Finance or Telecom) attach to the Capital Notes.

(c) Capital Notes will be issued with an election date for redemption of up to 15 years, and not less than 4 years, from the relevant date of issue.

(d) Prior to each election date, Noteholders may elect to retain some or all of their Capital Notes for a further period on new terms and conditions as determined by TC Finance, or to redeem some or all of their Capital Notes. Subject to being solvent (in the opinion of its directors) and the obligations of the pari passu provisions in Article XI of the US Indenture, TC Finance has the option as to whether to redeem the Capital Notes for cash or Telecom Shares (or ADRs). In the event that TC Finance elects to redeem any of the Capital Notes for Telecom Shares (or ADRs), TC Finance will procure the issue by Telecom of such number (fractions being rounded to the next whole number) of Telecom Shares as are equal in value to the Cash Redemption Amount of the Capital Notes which are being redeemed by the issue of Telecom Shares. The value of Telecom Shares or ADRs in such a case means 90 percent of the average market price of Telecom Shares on the New Zealand Stock Exchange (“NZSE”) where applicable, or 90 percent of the average market price of the Telecom ADRs on the New York Stock Exchange (“NYSE”), as more particularly determined in accordance with clause 12.4 of the US Indenture.

(e) The 10 percent discount to the current average market price at the time of issue of the Telecom Shares, as described in paragraph 3 (1) (d) of this determination, only relates to the discount to current market price that may occur if Noteholders sought to realise cash by selling such Telecom Shares or ADRs. In particular, the intention of the discount is that the Noteholder suffers no detriment from any election by TC Finance to redeem the Capital Notes for Telecom shares or ADRs due to the costs of having to exchange such shares or ADRs for cash, and the risk that large scale selling of Telecom Shares or ADRs on the market at that time will put downward pressure on their price.

(f) To the extent that any Capital Note is redeemed for Telecom Shares (or ADRs), the decision that TC Finance will elect to redeem such Capital Note for Telecom Shares (or ADRs) (as opposed to cash) will not be as a result of any contract, agreement, plan or understanding (whether enforceable or unenforceable) between TC Finance and/or