BIR Ruling [DA-009-01]

January 30, 2001 BIR RULING [DA-009-01] Secs. 27 (A), 34, 146-95; DA-381-08-24-98 KPMG-Laya Mananghaya & Co . 22/F Antel 1000 Corporate Centre 139 Valero Street, Makati City Attention: Atty . Francisco G . Tagao and Atty . Ma . Louella M . Aranas Gentlemen : This refers to your letter dated December 15, 2000 stating that your client, Standard Chartered Bank (SCB), through its Japanese branch will enter into a cross currency swap transaction with the Philippine parent company ("PC") of various operating companies duly organized and existing under Philippine laws; that SCB is a banking institution organized and existing under the laws of the United Kingdom; that it has a branch office in Japan; that PC is also the holding company of the said operating companies; that as a holding company overseeing the operations and management of the operating companies, PC also acts as the centralized treasury unit of the latter; that this is in accordance with the best international treasury practices; that part of its treasury functions is to source and provide funding to the operating companies considering that it is able to raise external financing more efficiently and competitively by securing better and competitive credit terms than the operating companies raising funding by themselves; that it also adopts a centralized hedging policy in line with best practice considering that it is more cost efficient to transact hedges and swaps through a centralized treasury unit; that this removes the need to negotiate swap contracts individually for each operating subsidiary each time a swap is undertaken; that furthermore, there are pricing advantages to this approach; that the parent company is usually a better credit which means a bank will charge a lower credit spread on the swap; that accordingly, it enters into currency swap agreements for purposes of hedging the foreign exchange exposure of foreign loans entered into by it and its operating companies arising from foreign exchange risks due to the fluctuation of the Philippine peso conversion rates vis-a-vis other foreign currencies; that in this particular instance, a Philippine logistics subsidiary incurred a Yen loan from SCB-Japan; that as part of the centralized treasury function and hedging policy of its parent company, PC will enter into a cross currency swap with SCB-Japan; that in your supplemental letter request dated January 30, 2001, it is represented further that the Manila Branch of Standard Chartered Bank will have no participation in the transaction between SCB-Japan and PC; that the cross currency swap will be a transaction entered into directly between SCB-Japan and PC without any intervention from SCB Manila Branch; that additionally you submit that should the swap transaction between SCB-Japan and PC involve the issuance of bills of exchange whether domestic or foreign or an order for the payment of money as contemplated under Sections 181 and 182 of the Tax Code of 1997, then the tax of Thirty Centavos (P0.30) on each Two Hundred Pesos (P200.00) or a fractional part thereof, of the face value of any such bill of exchange or order, or the Philippine equivalent of such value if expressed in foreign currency, should be imposed accordingly. In connection therewith, you are requesting confirmation of your opinion as follows: 1. Foreign exchange gain realized in the net swap payments by PC with SCB-Japan, its counterparty, is subject to the 32% corporate income tax under Section 27(A) of the Tax Code of 1997. On the other hand, foreign exchange loss incurred in the net swap payment made by PC with SCB-Japan, its counterparty, is deductible expenses under Section 34 of the Tax Code of 1997 for income tax purposes. 2. The currency swap agreement entered into by PC with SCB-Japan, its counterparty, is not subject to documentary stamp tax (DST) as this is not a loan agreement but merely an exchange of cash flows between the parties. (BIR Ruling No. 146-95 dated September 19, 1995) Further, currency swap agreements are not one among those instruments falling under any of the documents enumerated under the Tax Code of 1997 that are subject to a specific DST. (BIR Ruling No. DA-381-08-24-98 Undated) In reply, please be informed as follows: 1. Foreign exchange gain realized in the net swap payments by PC with SCB-Japan, its counterparty, is subject to the 32% corporate income tax under Section 27(A) of the Tax Code of 1997. On the other hand, foreign exchange loss incurred in the net swap payment made by PC with SCB-Japan, its counterparty, is deductible expenses under Section 34 of the Tax Code of 1997 for income tax purposes. aETDIc 2. The currency swap agreement entered into by PC with SCB-Japan, its counterparty, is not subject to documentary stamp tax (DST) as this is not a loan agreement but merely an exchange of cash flows between the parties. (BIR Ruling No. 146-95 dated September 19, 1995) Further, currency swap agreements are not one among those instruments falling under any of the documents enumerated under the Tax Code of 1997 that are subject to a specific DST. (BIR Ruling No. DA-381-08-24-98 Undated) Moreover, the DST as contemplated under Sections 181 and 182 of the Tax Code of 1997 on the order for the payment of money drawn in a foreign country but payable in the Philippines and an order for the payment of money drawn in but payable out of the Philippines with the tax of Thirty Centavos (P0.30) on each Two Hundred Pesos (P200.00) or a fractional part thereof, of the face value of any such bill of exchange or order, or the Philippine equivalent of such value if expressed in foreign currency, should be imposed accordingly. This ruling is being issued on the basis of the foregoing facts as presented. 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, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group