BIR Ruling [DA-097-99]

February 15, 1999 BIR RULING [DA-097-99] Solidbank 777 Paseo de Roxas Makati City Attention: Mr . Ricardo V . Martin First Vice President & Financial Controller Gentlemen : This refers to your letter dated June 2, 1998 requesting for a ruling with regard to the imposition of documentary stamp tax on import transactions using the facilities of the SOLIDBANK ("Bank"). It is represented that in a typical import transaction using the facility of the Bank, the following essential procedures and documentation are being followed, viz: "a) Our client-importer, having completed the negotiations with its foreign supplier on the terms of the importation, makes an application with us for the opening of a letter of credit. The application form spells out the terms and conditions agreed upon between the importer and supplier, as well as the agreements between the importer and this bank with respect to the documentary requirements of the transaction and the obligations of the parties including the financing aspects and release of the items imported. On the basis of this application, the bank opens a letter of credit in behalf of its client which is transmitted by airmail or cable to the supplier-beneficiary or its bank abroad. "b) Shipment is effected by the foreign supplier and all the necessary documents on the importation are forwarded to us, including one set of the draft drawn under the letter of credit. This draft is denominated in foreign currency and represents the value of the importation. It is to be paid by our client together with all the fees and charges on the shipment, including correspondent bank charges and these client obligations are summarized in a statement of account. The import documents are released to the client upon payment of all amount due; however, if an arrangement for later payment is agreed upon for, say 60 days, a draft denominated in pesos for the total obligation of the client to the bank is drawn and accepted by the client. Such acceptance is indicated on the face of the draft with the corresponding payment date and interest rate. The documents are released upon the clients execution of a trust receipt for the imported items. that your standard application for LC form which is signed by clients applying for the issuance of an LC already contains complete provisions regarding the description of the items imported and the details about the documentation of the importation such as the numerous undertakings of the importer as to its indebtedness to the bank, the securitization thereof, the title to the goods and the lien of the bank thereon in the event of release of documents, the determination of the amount of liabilities and any interest thereon and the provisions on default and other conditions that bind both the bank and its client to their respective obligations with respect to the transaction; that in short, the application for a letter of credit in itself can be regarded as a loan agreement among the parties to the importation, the same with the following provisions: "1. Reimbursement by Applicant/Constitution of Application as a Promissory Note This application shall, without the need of any other instrument, constitutes as the undersigned's formal certificate of indebtedness, as full and complete as any promissory note/s which may be required by SolidBank to be accomplished now or at any time before the liquidation of the obligation." that based on the standard application, the Bank opens the LC and sends it to the beneficiary/correspondent bank, either by mail or cable, the application form which contains the terms agreed upon between the client-importer and the supplier as regards the shipment to be effected and the assurance of payment by the importer; that the drawing of the draft by the foreign supplier is a necessary element of the LC and is also one of the modes prescribed in international transactions; that such negotiation is a mere extension of the provisions of the LC; that the draft also serves as a bill by the supplier to the importer on the basis of the foreign currency value of the shipment; that since the draft is in foreign currency, it is incomplete as to the total indebtedness of the client as it does not include all the charges which the negotiating bank charges; that the terms of the LC application authorize the bank to convert sight drafts to usance acceptances, thus, when no immediate payment is forthcoming from the client and subject to deferment of payment, the bank causes the replacement of the foreign draft into a peso draft; that the amount of the draft considers the agreed exchange rate as well as, all charges allowed against the importer; that when the draft is accepted by the importer, indicating the stipulated interest rate and maturity, the release of the import documents can be allowed subject to the execution of a trust receipt; that the essential provisions of the trust receipt are already found in the letter of credit application whereby the title to the goods, the debtor's obligation, the disposition of money proceeds and other matters are duly provided for; and that you are of the opinion that only one documentary stamp tax is required on every importation regardless of the number of procedures involving execution of various documents. In reply, please be informed that Section 7 of Revenue Regulations No. 9-94 (Documentary Stamps Regulations) implementing Section 180 of the Tax Code of 1997 (also Sec. 180 of the 1977 Tax Code, as amended), 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 the client-importer and approval by the Bank, as evidenced by a Letter of Credit; negotiation for payment of the same LC by the beneficiary; and finally, when no payment is forthcoming for which the bank causes the replacement of the foreign draft into peso draft subject to the acceptance by the importer, the client-importer-entrustee avails of the Trust line which is actually covered and incorporated in the LC-TR, 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. LLjur 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)