BIR Ruling [DA-083-00]

February 8, 2000 BIR RULING [DA-083-00] Quiason Makalintal Barrot Torres & Ibarra 21st Floor, Robinsons-PCIBank Tower ADB Avenue, corner Pedro Poveda Road Ortigas Center, 1605 Pasig City Attention: Atty . Ruelito Q . Soriano Gentlemen : This refers to your letter dated September 7, 1999, in behalf of your client, Bayan Telecommunications. Inc. (Bayantel) requesting for a confirmation of your following, opinions: (a) The issuance, offer and sale of the Original Notes and Exchange Notes qualify as a public issue of bonds or bonded indebtedness; LibLex (b) The Original Notes and Exchange Notes will be considered "bonds," and thus, the issuance of the Exchange Notes is subject to documentary stamp taxes under Sec. 175 of the NIRC; (c) In cases where the Original Notes and Exchange Notes are registered in the name of non-resident foreign corporations which are residents of treaty countries, the interest paid to said corporations are subject to a withholding tax of ten percent (10%); (d) The interest payable on the Original Notes and Exchange Notes held by non-resident foreign corporations which are residents of non-treaty countries shall be subject to a withholding tax of twenty percent (20%); (e) The Original Notes and Exchange Notes, being mere replacements of the Original Notes and Exchange Notes without any pecuniary benefit to Bayantel, are not subject to documentary stamp tax. It is represented that on July 22, 1999, Bayantel issued the Original Notes in a private offering: that Bayantel now intends to exchange the Original Notes with the Exchange Notes; that all other terms contained in the Original Notes are reproduced in the Exchange Notes: i.e. same interest rates, same payment and repayment dates; that the Exchange Notes will be issued in registered form in unit denominations of US$1,000; that the Exchange Notes will not be offered and sold in the Philippines; that considering that the Exchange Notes will only be issued in exchange for the Exchange Notes, Bayantel will not receive any proceeds from the issuance of the Exchange Notes; that neither will it receive any concessions since the payment dates, interest rates and maturity date are the same as the Exchange Notes; that the Exchange Notes, like the Original Notes will earn interest at the rate of 13.5% per annum, payable in two equal semi-annual installments on January 15 and July 15 of each year, commencing on July 22, 1999; and that upon maturity the Exchange Notes will be redeemed by Bayantel at 100% of the face value thereof. In reply, please be informed that the term "bond" is a very broad term. Fundamentally, it is an obligation; a written promise to pay money. It is thus similar to, and may be said to be a form of a promissory note. (par. 25, 11 Am Jur 2d) Since the Notes will be used in a particular registered form, indicating therein the undertaking of Bayantel to pay 100% of the face value of the Notes upon maturity as well as to pay interest at the rate of 13.5% per annum, payable in two equal semi-annual installments on January 15 and July 15 of each year, commencing on July 22, 1999, and will be offered to interested investors/buyers, the notes are considered as public issues of bonded indebtedness. (BIR Ruling Nos. 018-98, 052-98 and 062-98) However, the Notes which qualify as bonds or bonded indebtedness shall be subject to the documentary stamp tax imposed under Section 174 of the Tax Code of 1997. LibLex Since the notes constitute a debt item/loan of Bayantel, interest income derived from the Notes by corporate residents of countries which have no tax treaty with the Philippines shall be subject to a 20% withholding tax pursuant to Section 28(B)(5) of the Tax Code of 1997. Interest income derived from the Notes by corporate residents of countries which have a tax treaty with the Philippines shall be subject to the tax rate provided in the said treaty. Moreover, the Exchange Notes, being mere replacements of the Original Notes without any pecuniary benefit to Bayantel, are not subject to documentary stamp tax pursuant to Section 6 of Revenue Regulations No. 26, otherwise known as the Revised Documentary Stamp Tax Regulations. (BIR Ruling No. 52-98 dated May 5, 1998) 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, this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group