BIR Ruling [DA-047-96]

January 31, 1996 BIR RULING [DA-047-96] San Miguel Corporation 40 San Miguel Avenue Mandaluyong City Attention: Mr . Jose S . Tayag, Jr . Vice President & Tax Manager Gentlemen : This refers to your letter dated November 22, 1995 stating that San Miguel Corporation (SMC) is a corporation organized and existing under the laws of the Philippines; that it is engaged in several lines of businesses in various locations all over the Philippines; that SMC is the market leader in most of the industries it operates in; that in order to maintain its market leadership and in preparation for the more intense competition from huge multinational corporations due to the General Agreement on Trade and Tariff (GATT), the company is embarking in the expansion of its facilities, acquisition of assets and inventories, upgrading and modernizing its plants, among others, the recently inaugurated Davao Brewery in Mindanao; that SMC is currently financing the above activities, including infusion of additional working capital, with borrowings from domestic and foreign financial institutions; that these loans bear interest at varying rates and are payable in five years; that some of the loans are from Euronotes syndicated by J.P. Morgan Securities of London, England; and that none of the creditors are related to SMC. Based on the foregoing representations, you are now requesting confirmation of your opinion that the interest expenses on the loan incurred in relation to the acquisition of the assets and inventories should be treated as ordinary and necessary business expenses because the same were incurred in relation to the ordinary and normal business activities. In reply, please be informed that pursuant to Section 29(b)(1) of the Tax Code, as amended, the amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business except on indebtedness incurred or continued to purchase or carry obligation the interest upon which is exempt from taxation as income is deductible from gross income. Since the interest to be paid by SMC on its loans obtained from various domestic or foreign financial institution used by it in connection with its business, i.e., embarking in the expansion of its facilities, acquisition of assets and inventories, upgrading and modernizing its plants, said interests are deductible from its gross income under Section 29(b)(1) of the Tax Code, as amended. (BIR Ruling No. 600-88 dated December 27, 1995) cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head, Revenue Executive Assistant (Legal Service)