BIR Ruling [DA-175-03]

May 4, 2003 BIR RULING [DA-175-03] BIR Rlng Nos. 108-99; 144-85; 206-90; 137-97 Castillo Laman Tan Pantaleon and San Jose Law Offices 2nd, 3rd and 4th Floors, The Valero Tower 122 Valero Street, Salcedo Village Makati City; Metro Manila Attention: Atty. Ma. Victoria D. Sarmiento Atty. Virginia B. Viray Gentlemen : This refers to your letter dated June 26, 2000 requesting on behalf of your client, Essilor Manufacturing Philippines, Inc. ("Essilor"), for confirmation on the following, viz. : "1. No documentary stamp tax ("DST") on original share issuance is due notwithstanding the remittance by Essidev to Essilor of the deposit for future stock subscription because the increase in the authorized capital stock was not approved by the SEC. "2. The inter-company memorandum evidencing the conversion of the deposit for future stock subscription amounting to US$1,000,000.00 to inter-company advances is subject to DST on loan agreements. "3. Interest earned by Essidev on the inter-company loan shall be subject to tax at the rate of 15% of the amount of interest pursuant to the RP-France Tax Treaty. "4. Upon payment and remittance by Essilor to Essidev of the principal obligation in the amount of US$1,000,000.00, any realized foreign exchange losses arising from the decrease in the value of the Philippine Peso from the time of Essilor's receipt of the amount until the time of payment thereof to Essidev is an ordinary and necessary business expense which may be claimed by Essilor as deduction from gross income pursuant to Section 34 of the National Internal Revenue Code of 1997." It is represented that Essilor is a corporation organized and existing under Philippine laws and wholly owned by Essidev, S.A. ("Essidev"), a non-resident foreign corporation organized and existing under the laws of France; that on October 16, 1999, the Board of Directors of Essilor resolved to increase the authorized capital stock of Essilor from 5,500,000 to 6,500,000 shares; that Essidev made an advance deposit in the total amount of US$1,000,000.00 for its subscription to the future increase in Essilor's authorized capital stock; that such deposit was converted and recorded in the books of Essilor using the exchange rate at the time of receipt (US$1=PhP38.558), and disclosed in its financial statements for the year 1999 as deposit for future stock subscription; that on May 4, 2000, the Board of Directors of Essilor revoked its board resolution of October 16, 1999, which revocation was ratified by the stockholders of Essilor and was made before an application for increase in authorized capital stock was filed with the Securities and Exchange Commission ("SEC"); that the revocation was made because additional Capital infusion was no longer required in view of the satisfactory financial performance of Essilor in 1999 and the first quarter of 2000, and the reduced capital outlays for the year 2000; and that the parties instead agreed that Essidev's deposit for future stock subscription be converted into an interest bearing inter-company US Dollar denominated loan. Hence, this request. In reply, please be informed that your opinion is hereby confirmed as follows: I. Under Revenue Memorandum Order No. 8-98, as amended by Revenue Regulations No. 6-2001 and further amended by Rev. Regs. No. 12-2001, all existing corporations with authorization for increase in capital stock shall file their Corporate Stock DST Return on subscriptions made after the authorization on or before the 5th day of the month following the date of authorization. Pertinent portion of the aforesaid Rev. Regs. 6-2001, as amended, provides: EDCcaS "SEC. 5. Time for Filing of Documentary Stamp Tax Returns and the Payment of Taxes Due thereon . The time for filing of the documentary stamp tax returns and the payment of the taxes due thereon shall be revised in accordance with the appropriate amendments to existing regulations, as presented below. "(1) Paragraph 19 of Revenue Memorandum Circular No. 1-98 is hereby amended to read as follows: "(19) The documentary stamp tax return shall be filed within five (5) days after the close of the month when the taxable document was made, signed, accepted, or transferred, and the tax thereon shall be paid at the same time the aforesaid return is filed ." Prior to the approval by the SEC of the increase in a corporation's authorized capital stock, there is no authorized capital which may be subscribed, and thus, no subscribed capital that may be subjected to DST on original issuance of stock. The increase in the authorized capital stock of Essilor was revoked by its Board of Directors and as such, no application to increase authorized capital stock was ever filed with the SEC. Since there is no increase in the authorized capital stock, there will be no authorized capital to subscribe and hence, no subscribed capital that may be subjected to DST on original issuance of stock. II. An inter-company memorandum covering advances granted by a corporation to an affiliate company or an inter-office memo evidencing lendings/borrowings is in the nature of a promissory note subject to the DST imposed under Section 180 of the Tax Code ( BIR Ruling No. 108-99 dated July 15, 1999 ). The inter-company memorandum between Essilor and Essidev is in the nature of a loan agreement that is subject to the DST imposed under Section 180 of the Tax Code. III. Article 11 of the RP-France Tax Treaty provides: "Article 11 "2. . . . such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 15% of the amount of the interest. Thus, interest on the inter-company loan earned by Essidev, as the beneficial owner of thereof, shall be subject to tax at the rate of 15% of the amount of interest. IV. When foreign currency acquired in connection with a transaction in the regular course of business is disposed of, ordinary gain or loss results from the exchange rate fluctuations. The loss is deductible only for the year it is actually sustained. It is sustained during the year in which the loss occurs as evidenced by a closed and completed transaction and as fixed by identifiable events occurring in that year. A closed transaction is a taxable event which has been accumulated ( BIR Rulings 144-85; 206-90; 137-97 ). In the case of Essilor, its remittance to Essidev of its obligation consisting of the principal and interests consumerates the transaction. If upon remittance, Essilor actually sustains a foreign exchange loss, Essilor may deduct the same from the gross income in the year it sustains such loss as an ordinary and necessary business expense. ( Section 34(A)(1)(b), 1997 Tax Code ). This ruling is issued on the basis of the foregoing facts as represented and will be considered null and void if upon investigation it will be disclosed that the facts are different. IDSaEA Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group