BIR Ruling [DA-080-04]

February 23, 2004 BIR RULING [DA-080-04] BIR Ruling No. 026-02; Sec. 180 Home Guaranty Corporation 335 Sen. Gil J. Puyat Avenue Makati City Attention: Gonzalo Benjamin A. Bongolan President Gentlemen : This refers to your letter dated June 5, 2003, seeking for reconsideration of BIR Ruling No. 026-02 dated June 27, 2002, which subjects to the documentary stamp tax (DST) imposed under Section 180 of the Tax Code of 1997 the original issuance of the Zero Coupon Bonds ("HGC Zeroes") issued by the Home Guaranty Corporation (HGC). Facts HGC has already paid the DST on original issuance of the HGC Zeroes following BIR Ruling NO. 026-02 on the matter. However, as represented, it paid said DST under protest to avoid the penalties that it may incur resulting from the delay in the payment thereof in the event that herein request for reconsideration is denied. Taxpayer's Position HGC's posits that HGC Zero Coupons should not be subjected to the aforesaid DST pursuant to Section 5 of Republic Act No. 8763, otherwise known as the "Home Guaranty Corporation Act of 2000 (HGC Charter) pertinent portion of which reads as follows: "SEC. 5. Corporate Powers and Functions . The Corporation, in addition to the regular powers and functions provided under Section 36 of the Corporate Code, shall have the following powers and functions, subject to the limitations hereinafter provided: "xxx xxx xxx "(f) To borrow money and/or to issue bonds, debentures, securities, collaterals, notes, and other obligations in local currencies with the approval of the President of the Philippines after consultation with the Monetary Board of the Bangko Sentral ng Pilipinas, and in foreign currencies, here or abroad, with the approval of the President of the Philippines, in consultation with the Monetary Board of the Bangko Sentral ng Pilipinas and the Secretary of Finance, but in no case to exceed at any one time the aggregate amount of the principal obligation of all mortgages and accounts guaranteed under this Act and the rules and regulations prescribed by the Corporation, and in such manner as may be stipulated therein and shall bear such rate of interest as may be fixed by the Corporation. Such obligations shall be secured by the assets of the Corporation, including the stocks, bonds, debentures and other securities underwritten, purchased or held by it under the provisions of this Act. Such obligations may be issued and offered for sale at such price as the Corporation may determine, and shall be exempt from taxation as hereinafter provided as to principal and interest, except estate, inheritance and gift taxes." HGC further states that "the obligations referred to in the aforequoted provision, of the HGC Charter cover the bonds in the form of HGC zeroes, issued and offered for sale by HGC, and such, as expressly stated, shall be exempt from taxation as to the taxation as to the principal and interest, except estate, inheritance and gift taxes." In BIR Ruling No. 026-02, the BIR is cognizant of the fact that HGC Zeroes is an obligation of HGC incurred through the issuance of a public instrument and inasmuch as the obligations of HGC are expressly granted tax exemption under Section 5(f) of its Charter, as to the principal and interest, consequently, the proof of such obligation, that is the Zero Coupon Bond itself is exempt from all forms of taxation, including DST. HGC proposed that the only exceptions to the exemption granted by the HGC Charter are taxation through estate, inheritance and gift. Since there is no mention of documentary stamp tax, such that, if the legislature intended the DST is likewise to be imposed against such obligations under the appearance of instrument or evidence of indebtedness, it should have stated or included DST in the exception clause of Section 5(f) of the HGC Charter. Thus, applying the rule on statutory construction " Expressio unius est exclusion alterius (what the law does not include, it necessarily excludes)" since DST was not included in the enumerated exception from tax exemption, then it is necessarily included as among the taxes covered by the exemption. Finally, HGC concluded that, applying another basic rule of statutory construction that as between specific and general statute, the specific statute must prevail since it evinces the legislative intent more clearly than a general statute does, the provision of Section 180 of the Tax Code of 1997 which imposes DST on, among others, deposit substitute debt instruments must yield to Section 5(f) of the HGC Charter which expressly exempts. HGC's obligations issued or may be issued by HGC, including HGC Zeroes, from taxation except estate and gift taxes. DTIaHE BIR Reply Pertinent portion of Section 5(f) of the HGC Charter, supra , in reference to the power of the Corporation to borrow money and/or issue bonds, debentures, securities, collaterals, notes and other obligations in local currencies upon the approval of the President of the Philippines, provides that "such obligations may be issued and offered for sale at such price as the Corporation may determine, and shall be exempt from taxation as hereinafter provided as to the principal and interest, except estate, inheritance and gift taxes." On the basis of the foregoing provision that HGC is requesting exception to the imposition of DST on such obligations, specifically, the HGC Zeroes. HGC posits that the exemption from taxation of HGC's obligations covers all taxes, except estate, inheritance and gift taxes. We disagree. The law is very clear that the exemption from taxation of HGC's obligations relates only to taxes being imposed on the principal and interest as provided for in Section 19 thereof, to wit: "SEC. 19. Tax Exemption . Interests and yields earned or accumulated on mortgage, debentures, bonds, notes, mortgage and asset-backed securities, interest under a lease, and other credit instruments, whether issued by the Corporation or covered by its guaranty in favor of natural or juridical person, in cash or in bonds, shall be exempt from all taxation to the same extent provided in Section 15(a) hereof: Provided, however , That the Corporation shall have the authority to increase the limit of such exemption in such varying amounts and shall be reflective of the social concerns of the State: Provided, further , That the exercise of said authority shall be subject to the approval of the President of the Philippines upon the recommendation of the Bangko Sentral ng Pilipinas: Provided, finally, That the Corporation shall not exercise such authority more than once every five (5) years." In reference to Section 15(a) of the HGC, the same provides as follows: "SEC. 15. Guaranty Coverage and Composition of Guaranteed Accounts . (a) The Corporation shall guaranty payment of the balance outstanding and due on the guaranteed principal obligation, plus interest and yields thereon up to eleven percent (11 %) per annum for socialized housing packages; ten percent (10%) per annum for low-cost housing packages; nine and one-half percent (9.5%) per annum for medium-cost housing packages; and eight and one-half percent (8.5%) per annum for open housing packages; . . ." A reading of the foregoing provisions, this Office hereby opines that the extent of the tax exemption being referred to under Section 5(f) of the HGC Charter is limited in nature and would cover only taxes being imposed on the principal and interest of such obligation. Hence, we concluded that the tax exemption of HGC's obligations is not absolute and necessarily would relate only to taxes being imposed on the principal and interest and that is, income tax or the 20% final tax imposed on deposit substitute instruments. Moreover, HGC is acquiesced of the fact that the extent of tax exemption of its obligations is being limited by the utilization of such Corporate borrowings. 1 On the basis of the foregoing, this Office has ruled that interest or income earned from HGC Bonds ( i.e. , the discount to face value) up to the extent of the weighted average rate of 10.15% is exempt from income tax pursuant to Section 19 of the HGC Charter, as implemented by Article 44 of the Implementing Rules and Regulations of the HGC. 2 In light of the above, the herein request for exemption from the imposition of DST on HGC Zeroes is denied for lack of legal basis. Consequently, we hereby reiterate our ruling in BIR Ruling No. 026-02 dated June 26, 2002, supra , that the original issuance of the HGC Zeroes shall be subject to the DST imposed under Section 180 of the Tax Code of 1997, while the transfer thereof in the secondary market is exempt. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. Article 44, Rule IX of the Implementing Rules and Regulations of the HGC . 2. BIR Ruling No. 026-02 dated June 27, 2002.