BIR Ruling [DA-107-01]

June 1, 2001 BIR RULING [DA-107-01] 173; R.A. 7916 008-99; 198-99; 007-2000 Philippine International Air Terminals Co . , Inc . (PIATCO) 3/F PAIR-PAGS Center, Ninoy Aquino International Airport, Pasay City Attention: Atty . Katherine M . C . Arnaldo Legal Counsel Gentlemen : This refers to your letter dated November 7, 2000 requesting for a ruling that loan agreements between Philippine International Air Terminals Co., Inc. (PIATCO) and international organizations, or non-resident foreign banks, financial institutions and entities, including those which are instrumentalities of foreign governments, are not subject to documentary stamp taxes (DST). It is represented that PIATCO is a corporation duly registered with the Securities and Exchange Commission and the Bureau of Internal Revenue. It is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Developer/Operator under Certificate of Registration No. EZ-98-01 dated February 3, 1998 and as an Ecozone Facilities Enterprise with Certificate of Registration No. 98-01-F dated May 8, 1998. PIATCO has availed of the 5% preferential tax rate granted under Republic Act No. 7916, as amended, in lieu of all national and local taxes. It is further represented that PIATCO has entered into and will be entering into loan agreements with international organizations and with non-resident foreign entities, banks or otherwise, which have no permanent establishments in the Philippines and are not engaged in business herein. Based on the foregoing, you now request for a ruling on whether PIATCO, a PEZA-registered enterprise under the 5% preferential tax regime, is exempt from DST. Further, you are seeking confirmation that PIATCO's loan agreements with (i) non-resident foreign entities with no permanent establishments in the Philippines and which are not engaged in business in the Philippines, including those which are instrumentalities of foreign governments; and with (ii) international organizations accorded immunity from taxation under international agreements to which the Philippines is a signatory, are transactions entirely not subject to documentary stamp taxes, given that both contracting parties are not liable to pay Philippine documentary stamp taxes. Finally, you request for a ruling that the same status applies to the renewals, extensions and continuances of said loan agreements, and promissory notes, mortgages, pledges, deeds of assignment and other security arrangements entered into in connection therewith. In reply, please be informed that Section 24 of Republic Act No. 7916, otherwise known as the Special Economic Zone Act of 1995, as amended, provides that, except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: (a) three percent (3%) to the National Government (b) one percent (1%) to the local government units where the enterprise is located, and (c) one percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ecozone. This exemption from the payment of national internal revenue taxes is reiterated in Section 1(A), Rule XIV of the Rules and Regulations to Implement Republic Act No. 7916 and implemented through BIR Revenue Regulations No. 12-97. Considering that PIATCO, a PEZA-registered enterprise, is liable for the preferential tax rate of 5% on its gross income earned, in lieu of all local and national taxes (except real property tax on land), it is exempt from the payment of all other national taxes including documentary stamp taxes (Revenue Regulations No. 12-97; BIR Ruling 146-99 dated 14 September 1999; BIR Ruling No. 008-99 dated 19 January 1999; BIR Ruling DA-333-7-21-98 dated 21 July 1998). This includes documentary stamp taxes on loan agreements (BIR Ruling No. 008-99 dated 19 January 1999), their renewals and continuances, mortgages, pledges, promissory notes and similar instruments. cASEDC Under Section 173 of the Tax Code of 1997, whenever one party to the taxable document enjoys exemption from documentary stamp taxes, the other party who is not exempt shall be the one directly liable for the tax. Ordinarily, PIATCO's contracting party is liable to pay the documentary stamp tax on these documents. However, no documentary stamp tax may be imposed where such other contracting party is likewise exempt from liability for documentary stamp taxes. Where PIATCO's contracting party is an international organization with taxation immunity (e.g. Asian Development Bank, International Finance Corporation), no documentary stamp tax is due on the transaction because both parties are not liable for said tax (BIR Ruling No. 028-85 dated 27 February 1985; BIR Ruling No. 198-99 dated 10 December 1999; BIR Ruling No. 234-82 dated 11 August 1982; BIR Ruling No. 227-83 dated 15 December 1983). On the other hand, where PIATCO's contracting party is a non-resident foreign bank, financial institution or entity with no permanent establishment in the Philippines and not engaged in business herein, including those which are instrumentalities of foreign governments, no documentary stamp tax is due on the transaction because such non-resident entity is not subject to Philippine taxation (BIR Ruling No. 007-00 dated 5 January 2000). This follows from the inherent limitation of taxation it can only be exercised within the territorial jurisdiction of the taxing authority. For the same reasons cited above, renewals, extensions and continuances of these loan agreements, and promissory notes, mortgages, pledges and other security arrangements entered into by the above-described parties in relation with their loan agreements, are transactions which do not give rise to liability for documentary stamp taxes. 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group