BIR Ruling [DA-197-00]

March 30, 2000 BIR RULING [DA-197-00] 182; DA-585-98; DA-197-2000 Bangko Sentral ng Pilipinas Foreign Exchange Department Manila Attention: Ms . Celia M . Gonzalez Director Gentlemen : This refers to your letter dated April 8, 1999 requesting clarification on BIR Ruling No. 585-98 dated December 29, 1998, whether renewals of Foreign Exchange Contracts (FECs) are subject to documentary stamp taxes (DST), when no cable instructions emanate from these renewals. The pertinent portion of BIR Ruling No. DA-585-98 dated December 29, 1998 states as follows: "Please be informed that the FECs executed by the BSP with local commercial banks are actually the so-called 'Swap Transactions' whereby the local bank issued an order or cable/instruction to its foreign correspondent bank to remit a specific sum in dollars/foreign currency to the Federal Reserve Bank which in turn advises the BSP that a specific sum in dollars/foreign currency is available to the local bank. The said order or cable is considered a telegraphic transfer subject to the Documentary Stamp Tax under then Section 182 of the Tax Code of 1977 (now also Section 182 of the Tax Code of 1997) as amplified by Sections 50 and 51 of Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations.. . ." LexLib ". . . Accordingly, the DST prescribed by Section 182 of the Tax Code of 1997 is due and payable on the order covering the forward transaction as well as the order covering or leading to the spot sale of foreign exchange and not the document embodying the 'Offer to Sell Spot Exchange under Swap Arrangement' or the sale or purchase of foreign exchange which is not subject to DST." It is represented that a swap transaction (defined as spot purchase of foreign currency and a forward sale of the same amount of currency) entered into by an authorized agent bank (AAB) and the then Central Bank of the Philippines (CBP) is a two-legged transaction; that in the first leg an AAB sells USD to CBP; that in this phase, the AAB sends cable instruction to its foreign correspondent bank to debit its account and transfer the same to CBP's account with Federal Reserve Bank of New York (FRBNY), and simultaneously, CBP credits the PHP equivalent of USD to the demand deposit account of the AAB with the CBP; that in the second leg, CBP sells back the USD to the AAB at a specified rate on a specified date (maturity/delivery date); and that on this maturity date, CBP sends cable instruction to FRBNY to debit its account and transfer the same to the foreign correspondent bank of the AAB concerned; that because of the foreign exchange situation in the 1980's, CBP was unable to deliver the USD to AABs on maturity dates of the Swap Contracts; that CBP instead renewed the contracts several times whereby in the CBP books, a sale of USD against PHP to the AAB was recorded together with a simultaneous purchase by CBP of the same amount of USD from the AAB; and that there were no cable instructions emanating from the CBP or the AAB on these renewals. In reply please be informed that we confirm and reiterate BIR Ruling No. DA 585-98 dated December 29, 1998, that the DST in transactions of this nature is due solely on the order or cable transaction for the remittance of the corresponding amounts of USD and not on the FEC itself or the document denominated as 'Offer to Sell Spot Exchange under Swap Arrangement'. Neither is DST imposable upon the sale or purchase of foreign exchange as it is in fact not subject to DST. This is so because the ground relied upon for the imposition of DST in these cases is Section 182 of the 1997 Tax Code and Sections 50 and 51 of Regulations 26, which deal with telegraphic transfers and characterize what constitute such telegraphic transfers. Thus, said Section 182 mandates the payment of DST "on all foreign bills of exchange and letters of credit including orders, by telegraph or otherwise, for the payment of money issued by express or steamship companies or by any person or persons". In defining what may be regarded as telegraphic transfer, Section 51 of Regulations 26 provide: "If a local bank cables to a certain bank in a foreign country with which bank said local bank has a credit, and directs that foreign bank to pay another bank or person in the same locality a certain sum of money, the document for and in respect of such transaction will be regarded as a telegraphic transfer, taxable under the provisions of Section 1449(i) of the Administrative Code." The material element, which gives rise to liability for DST, is the order for payment or transfer of funds, and not the underlying agreement which led to said payment being made. This transmission is characterized as a telegraphic transfer for which DST is imposed. In essence, the payment of DST is required on the order/cable executing or implementing a prior agreement and not on the document embodying said agreement. Thus, DST applies only upon the execution stage, when an order is given to cover the forward transaction or to cover the spot sale of foreign exchange. Note therefore, that we maintain our position that if there is no cable, order, or advice given in relation to a Foreign Exchange Contract, or any renewal thereof, no DST is due and payable. Since it is explicitly represented that "there were no cable instructions emanating either from the CBP or the AAB on these renewals", despite CBP's having initiated the renewals, it is hereby ruled that no DST may be levied on the renewals aforementioned. It must be emphasized that as a general rule DST is due not only on the orders covering the original Swap Transactions or FECs, but even on their subsequent renewals. However, it must be equally stressed that DST becomes due, only if such renewals are covered by cab instructions or orders properly characterized as telegraphic transfers. Accordingly, since there were none issued in this case, said renewals initiated by the BSP are not subject to DST. llcd 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)