BIR Ruling [DA-022-02]

February 18, 2002 BIR RULING [DA-022-02] Sec. 195; DA-166-98 Puno and Puno Law Offices 12th Floor East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Attys. Elvin O. Reyes and Ma. Cristina M. F. Villanueva Gentlemen : This refers to your letter dated February 23, 2001 requesting on behalf of your client, Manila North Tollways Corporation (" MNTC ") for a confirmation of your opinion that the Omnibus Agreement which incorporates the several loan facility and security agreements to be entered into by MNTC with various lending institutions are subject to only one documentary stamp tax under the "one transaction" rule. It is represented that MNTC, the joint venture company formed by the Philippine National Construction Corporation ("PNCC"), First Philippine Infrastructure Development Corporation ("FPIDC") and Egis Projects S.A. of France was granted by the Republic of the Philippines, acting through the Toll Regulatory Board (the "TRB"), the concession (the "Concession") to finance, design, construct, operate and maintain the project roads (the "Project Roads") comprising of the North Luzon Expressway including the Subic Expressway and the Circumferential Road (C-5) as more particularly described in the Supplemental Toll Operation Agreement (the "STOA"), according to the performance standards, specification and implementation schedule set out in the STOA. The STOA was signed by and among MNTC as the Concessionaire, PNCC as the Franchisee and the Republic of the Philippines, acting through the TRB, as the Grantor. The STOA which was approved by the President of the Republic of the Philippines in June 1998 provides that all usufructuary rights, interests and privileges of PNCC, the original franchisee for the project roads, are transferred to MNTC and the latter has the right to collect tolls on the completed roads during the concession period after which the project roads will revert back to the Republic of the Philippines. To partially finance the estimated cost of Phase I of the concession (the "Project") of Three Hundred Seventy Million Dollars, United States Currency (US$370,000,000.00), MNTC will obtain various United States dollar-denominated loans in the aggregate amount of Two Hundred Sixty One Million Dollars, United States Currency (US$261,000,000.00) from the Asian Development Bank ("ADB"), International Finance Corporation ("IFC"), Export Finance and Insurance Corporation ("EFIC") and certain international financial institutions, alone (with respect to a letter of credit facility) and with political risk cover from the Multilateral Investment Guarantee Agency ("MIGA") and Compagnie Francaise d'Assurance pour le Commerce Exteriur ("COFACE) of France (collectively, the "Lenders") which are secured by, among other things, a lien on and security interest in: (a) substantially all of MNTC's assets, including real estate, personal property, and receivables; (b) rights under all project contracts; (c) proceeds of all insurances to the extent payable to MNTC; (d) all issued and outstanding shares of common stock of MNTC; and (e) all revenues to be derived from the operation of the project; that the specific terms relating to the amounts obtained, interest and fee rates charged, and the like, including terms and conditions specifically applicable to the respective Lenders, will be made subject to separate loan facility agreements, to wit : (i) the ADB Loan Agreement between the ADB, as Lender ;and MNTC, as Borrower; (ii) the ADB Complementary Loan Agreement between the ADB, as Lender and MNTC, as Borrower; (iii) the IFC Loan Agreement between the IFC, as Lender and MNTC, as Borrower; (iv) the EFIC Loan Agreement between the Export Finance and Insurance Corporation, as Lender and MNTC as Borrower; (v) The MIGA Covered Loan Agreement among the Borrower, the international financial institutions set forth therein and the facility agent party thereto; (vi) The COFACE Covered Loan Agreement among the Borrower, the international financial institutions set forth therein and the facility agent thereto; and (vii) The Letter of Credit Facility Agreement among the Borrower, the international financial institutions set forth therein and the facility agent party thereto. MNTC will, however, execute with the abovementioned lenders, FIDC and Egis Projects, S.A. as shareholders, the Security Trustee, the Co-Security Trustee, and the Intercreditor Agent and certain other parties an Omnibus Agreement ; which consolidates and embodies all the terms and conditions relating to the aforementioned facilities and security arrangements and incorporated therein are: (a) the Common Terms Agreement ("CTA") which embodies the terms common to the various loan facilities such as common events of default representations and covenants; (b) the Mortgage, Assignment and Pledge Agreement or the Master Security Agreement ("MSA"); which lays down, in detail, the rights and obligations of MNTC and the Lenders with respect to the properties over which the latter shall enjoy a preferred security interest and the modes of enforcing the said interest; (c) The Trust Retention Agreement ("TRA"), which provides for utilization, priority of payment and funds flow with respect to both Project debt and revenues; and (d) the abovementioned loan facility agreements with the different Lenders; that notwithstanding that all the terms and provisions of the loan facility agreements enumerated in paragraph (3) above are already incorporated and consolidated in the Omnibus Agreement, each of the said loan facility agreements, the CTA, MSA and the TRA will be executed separately by the respective parties thereto. MNTC will pay the documentary stamp taxes due on the aforementioned agreements in accordance with the rate prescribed by Section 195 of the National Internal Revenue Code of 1997 ("the NIRC") on the basis of the aggregate loan amount of Two Hundred Sixty One Million Dollars, United State Currency (US$261,000,000.00); that the MSA will be registered with the appropriate real property registries of the Office of the Register of Deeds of Caloocan City, Quezon City, Valenzuela City, Meycauayan, Bulacan, Tabang, Bulacan, San Fernando, Pampanga and Angeles City where the real estate subject to the mortgage are located, by entering the same, together with all the corporate documents of MNTC and its stockholders, the Original Certificates of Title ("OCT's") or Transfer Certificates of Title ("TCT's") evidencing ownership of the subject real estate, and certificates or proof of payment of the appropriate DST and real estate taxes, in both the primary entry and registration book of the said registries. The MSA will likewise be registered within the Chattel Mortgage Registry of the Office of the Register of Deeds of Caloocan City, Quezon City, Valenzuela City, Meycauayan, Bulacan, Tabang, Bulacan, San Fernando, Pampanga and Angeles City where the various personal properties subject to the chattel mortgage are located; that the aforementioned registrations will record the full amount of Two Hundred Sixty One Million Dollars, United States Currency (US$261,000,000.00) as the amount secured. In reply, please be informed that Section 8 of Revenue. Regulation No. 9-94. implementing R.A. 7660 provides, viz: "Sec. 8 LOAN AGREEMENT/PROMISSORY NOTES SECURED BY A PLEDGE/MORTGAGE . Where only one instrument was prepared, made, signed and executed to cover a loan agreement/promissory note, pledge/mortgage, the documentary stamp tax prescribed in Section 195 of the Tax Code, as amended, shall be paid and computed on the full amount of the loan or credit granted. In this regard, the instrument shall be treated as covering only one taxable transaction, subject to the higher documentary stamp tax (emphasis supplied) HScDIC Thus, in BIR Ruling UN-230-95 dated June 26, 1995, this Office ruled that ". . . Your opinion that the Agreement executed by PEC and the Lenders and the Sponsors to PEC which consolidates the loan agreements, the pledge, mortgage and other security devices shall be subject to only one documentary stamp tax based on the full amount of the loan is hereby confirmed. (BIR Ruling No. UN 20-94) Likewise, the Agreement for purposes of providing additional security to the Lenders will not be subject to the documentary stamp tax as long as there is no change in the original amount of the loan secured" (Emphasis supplied) (BIR Ruling No. 218-90; 059-91) The one-transaction rule regarding the imposition of DST is applicable notwithstanding the registration of the MSA in different Registries of Deeds, as ruled by this Office in BIR Ruling No. 389-93 as follows: "It is represented that your client, Pilipinas Shell Petroleum Corporation (PSPC), entered into separate loan agreements with several lending institutions . . . covering foreign-currency denominated loans in the aggregate amount of US$320 million; that the loans are secured, inter alia ; by a mortgage of practically all the .present and future refinery assets of PSPC, consisting of real and personal properties except inventories and stocks in trade; that the transaction is covered by several loan documents denominated as "Security Agreement" . . . that since the Security Agreement involves real and personal properties, the same shall be registered both in the primary entry book and registration book for real estate mortgage and for chattel (Chattel Mortgage Registry) with the proper Register of Deeds. . . " . . . The loan transaction and the Security Agreement entered into by and between your client, Pilipinas Shell Petroleum Corporation, and the various creditors mentioned above, shall be subject to a single payment of documentary stamp tax based on the aggregate loan amount of US$320 million (approximately P8.9 billion) regardless of the number of registration required (whether for real estate mortgage, chattel mortgage or otherwise ) to make the same effective against the third parties. (Emphasis Supplied)." Accordingly, this Office hereby confirms your opinion that the Omnibus Agreement which incorporates the CTA, MSA and related facility agreements executed by your client, Manila North Tollways Corporation, constitute one taxable transaction which is subject to only one DST imposed under Section 195 of the Tax Code of 1997. (BIR Ruling No. DA-166-98 dated April 22, 1998) SDIaCT 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. DTAESI Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue