BIR Ruling [DA-087-99]

February 12, 1999 BIR RULING [DA-087-99] Westmont Bank 411 Quintin Paredes Street Binondo, Manila Attention: Atty . Avelino C . Agulto VP Legal Department Gentlemen : This refers to your letter dated December 7, 1998, requesting for a ruling regarding the proper treatment of Letters of Credit (LC) opened by clients of Westmont Bank in so far as the required documentary stamp tax is concerned. It is represented that your clients normally open LC's for the purpose of importing foreign goods, equipment, or machinery to be used in their respective business; that the Bank's practice is to collect the documentary stamps tax thrice, i.e. upon opening of the letter of credit, upon negotiation of the letter of credit and at the booking of the trust receipt, if one is executed. cdll In reply, please be informed that pursuant to Section 173 of the Tax Code of 1997 a documentary stamp tax, while it is being levied on the document, is an excise tax because it is really imposed on the privilege to enter into a transaction. Thus, while there are various or series of documentation to be followed there seems to be only one transaction involved. Initially, an importer, who is your client, to open an LC with a bank in favor of its supplier. The opening of LC is, in reality, an application for a loan by the importer from the bank to assure the supplier that the goods to be delivered shall be paid. Likewise, the issuance of the said LC is tantamount to approval of the loan or opening a credit line for which a DST shall be imposed thereon pursuant to Section 182 of the same Tax Code. It should be noted, however, that the LC is not the loan itself but merely an instrument assigning the proceeds to the suppliers as payment for the goods delivered by them. The loan contract between the importer and the bank is a real contract effected by the delivery of the loan (see Art. 1934, New Civil Code). The said loan contract is deemed perfected upon completion of the loading of the goods and payment to the supplier. When the loading is completed, the beneficiary-supplier-exporter presents to the negotiating/paying bank for payment based on the draft or import bill corresponding to the actual goods shipped under the Letter of Credit, for which the documentary stamp tax is again due and levied on the same LC pursuant to Sec. 180 of the Tax Code of 1998. The basis of the levy of another DST on the LC is the consequence of the negotiation made, completely distinct from the first levy made on the same LC as a credit facility or as an evidence of the loan. Simultaneous to the opening of the LC as a credit facility, the Letter of Credit-Trust Receipt Line (LC-TR line) with the bank is deemed open. The TR line serves as a security in the event the loan is not paid within 30 days from completion of the delivery or negotiation of the LC. The availment of the LC-TR line is contingent to the non-payment of the loan, and for which availment, a DST is again imposed. In this connection, Section 7 of Revenue Regulations No. 9-94 (Documentary Stamps Tax Regulations) provides that where a loan agreement and a promissory note are simultaneously issued and executed, the loan having been secured, only one DST shall be imposed on either document, whichever will yield a higher tax. On the bases of the foregoing facts and clear provisions of the Tax Code, only one documentary stamp tax should be levied on the said importation involving several procedures, viz; opening of a credit line by client-importer and approval by the bank, as evidenced by an LC; negotiation for payment of the same LC by the beneficiary; and finally, in case payment is not made within 30 days, the availment of the Trust line through the execution of a Trust Receipt. (BIR Ruling No. 84-97 dated July 29, 1997) Accordingly, for each availment of the credit line, i.e., for every single importation, the corresponding documentary stamp tax, regardless of the procedures involved, is levied only once at the rate prescribed in Sec. 180 of the Tax Code of 1998. aisadc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)