BIR Ruling [DA-100-05]

March 31, 2005 BIR RULING [DA-100-05] Article 1179, NCC; Section 180 Tax Code; DA-105-2004 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10 Tower 1 6815 Ayala Avenue cor H.V. de la Costa St., Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated October 18, 2004 requesting in behalf of your client, Trust International Paper Corporation confirmation of your opinion that the execution of a document takes effect upon its execution and notarization for purposes of the documentary stamp tax. It is represented that Trust International Paper Corporation (TIPCO) is a domestic corporation duly organized and existing under the laws of the Philippines; that TIPCO entered into an Omnibus Agreement, as amended on July 27, 1999 with its lenders for the purpose of restructuring the payment of its loans with the said lenders; that the said Omnibus Agreement was further amended by a Second Amendment to the Amended and Restated Omnibus Agreement, which TIPCO and its Lenders executed on July 17, 2001; that on August 14, 2002, the parties executed a Third Amendment to the Amended and Restated Omnibus Agreement (Third Amendment) to restructure the payment terms of the loans, specifically involving the extension of the maturity dated up to 2009 and 2011, putting a floor and ceiling on the interest rates, indexing the spread on the interest rates to the international price of newsprint and stipulating amounts of principal repayments linked to the operation of the power plant as well as to the international newsprint prices, among others; that under Section 14 of the Third Amendment, non-compliance with any of the conditions stated in your letter shall render it without force and effect, and therefore will render the loan obligations of TIPCO to the Lenders due and demandable; that conditions being resolutory, TIPCO, at the time of the signing of the Third Amendment, already acquired the right to an extended maturity date of its loans, and the right shall be lost only upon non-compliance with any of the stated resolutory conditions; and that TIPCO complied with all the conditions stated in the Third Amendment. In reply, please be informed that Section 180 of the Tax Code of 1997, provides as follows: "SEC 180. Stamp Tax on All Bonds, Loan Agreements, Promissory Notes, Bills of Exchange, Drafts, Instruments and Securities Issued by the Government or Any of its Instrumentalities, Deposit Substitute Debt Instruments, Certificates of Deposits Bearing Interest and Others Not Payable on Sight or Demand. On all bonds, loan agreements, including those signed abroad, wherein the object of the contract is located or used in the Philippines, ...,there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200),or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: Provided, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: Provided, however, That loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary stamp tax provided under this Section." The above quoted Section clearly provides for the imposition of documentary stamp tax on loan agreements . Considering that the DST law was purposely to impose DST on negotiable instruments, and in the case of Section 180, on debt instruments, this Office confirms your opinion that the Omnibus Agreement which is indicative of a loan agreement between TIPCO and the lenders is subject to the documentary stamp tax under Section 180 of the Tax Code of 1997, as amended. The Omnibus Agreement and the subsequent amendments thereto are best characterized by Article 1179 of the New Civil Code which provides that "ART. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the events." Legally speaking, a condition is a future and uncertain event, upon the happening of which, is the effectivity or extinguishments of an obligation (or right) subject to it depends. A conditional obligation is one whose consequences are subject in one way or another to the fulfillment of a condition. A suspensive condition (condition precedent or condition antecedent) or one the fulfillment of which will give rise to an obligation (or right).In other words, the demandability of the obligation is suspended until the happening of the uncertain event which constitutes the condition while a resolutory condition (condition subsequent) or one the fulfillment of which will extinguish an obligation (or right) already existing. 1 In fine, the conditions set forth in the Third Amendment, are resolutory conditions, the non-compliance with which shall render the agreement to be without force and effect, and therefore, will render the loan obligations of TIPCO to the Lenders due and demandable. Finally, since TIPCO had subsequently acquired the right to an extended maturity date of its loans subject to the happening of the resolutory conditions set forth in said Third Amendment, there is cogent reason to rule that DST became due when the Omnibus Agreement was first executed and notarized. TSacCH 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, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group Footnotes 1. Page 75-76, 1995 Revised Edition, The Law on Obligations and Contracts, De Leon.