Puyat Jacinto & Santos

April 2, 2007 BIR RULING [DA-201-07] 179; 137-98 Puyat Jacinto & Santos 12/F Manilabank Building 6772 Ayala Avenue Makati City Attention: Atty. Regina Jacinto-Barrientos Atty. Virginia B. Viray and Atty. Divina Gracia Cabildo-Yap Gentlemen : This refers to your letter dated December 22, 2006 stating that your client, San Carlos Bioenergy, Inc. (SCBI), is a corporation duly organized and existing under the laws of the Philippines with principal office address at Emerald Arcade Building, F.C. Ledesma Avenue, San Carlos City, Negros, Occidental; that SCBI is registered with the Securities and Exchange Commission (SEC) on May 26, 2005 to engage primarily in the business of producing, marketing and selling bio-ethanol fuel, which business includes the construction and operation of an integrated sugar mill and bio-ethanol distillery complex that will produce bio-ethanol fuel, both hydrous and anhydrous, products from sugarcane and related raw materials, and renewable and alternative energy sources, including but not limited to steam, electricity, and power, and for this purpose, to undertake any related activity necessary for and conducive to the attainment of such purpose; that to finance the construction and operation of an integrated ethanol distillery and cogeneration power plant (the Project) with an output capacity of 125,000 liters per day (lpd) of fuel grade ethanol and approximately 8MW of electricity, SCBI secured a syndicated term loan with a credit limit of up to One Billion Seven Hundred Seventy Eight Million Pesos (P1,778,000,000.00); that the syndicated term loan will be fully funded by a group of lenders, each having a maximum amount of lending commitment, from the lender's respective availments under the following funding facilities of the Development Bank of the Philippines (DBP): (i) DBP Environmental Development Program (EDP); (ii) EIB-DBP Global Facility (EIB); and (iii) SIDA Credit Facility for Environmental Management Projects (SIDA); that specifically, the lender-banks are as follows with details on their funding and respective commitment: Name of Lender Funding Facility Amount of Commitment Development Bank of the EDP, EIB, SIDA P395,000,000 Philippines Banco de Oro Universal EDP 395,000,000 Bank Land Bank of the EDP 395,000,000 Philippines China Banking Corporation EDP 296,500,000 Equitable PCI Bank, Inc. 296,500,000 Total P1,778,000,000 ============ that also, in order to induce the Lenders to extend the financing described above, SCBI and its shareholder-corporations (namely: National Development Company, Bronzeoak Philippines, Inc., San Julio Realty, Inc., Valmayor Ventures, Inc., and Biofuel Resources, Inc.) have agreed to provide certain collateral security for the payment of the SCBI's obligations by constituting: (i) a first ranking mortgage over all of the mortgageable assets, including real and personal properties, of SCBI relating to the Project; (ii) a first priority pledge over the shares of the shareholder-pledgors in SCBI under their respective names and any future shares of stock that may from time to time be issued to the shareholder-pledgors or a nominee for the said pledgors; and (iii) an assignment of rights, title, interests and benefits of the SCBI in and to the Project Documents and the Performance Guarantees; that all agreements such as the funding facility loan agreements, Pledge Agreement, Mortgage Agreement, Assignment of Rights, as well as the agreement with the facility agent, collateral agent and the Debt Service Reserve Account Agent are embodied under one master agreement referred to as the "Omnibus Loan and Security Agreement" (Omnibus Agreement) which was signed by all the parties concerned on December 21, 2006; that the Omnibus Agreement sets forth the terms and conditions upon which the lenders have agreed to provide loans to SCBI (the Borrower) for the purpose of financing the Project; that essentially, Section 2.01, Part A of the Omnibus Agreement states the commitment of the Lenders under each funding facility to make available to the Borrower one or more advances from time to time during the availability period in an aggregate principal amount not exceeding their respective funding facility commitment upon fulfillment of required conditions precedent; that the general conditions precedent for borrowing are basically stated under Section 4.01, Part A of the Omnibus Agreement and at the same time under Section 6 of Part B, C, & D for each type of funding facility; that the two of the conditions precedent before the Borrower could draw on any fund facility are (i) the delivery by the Borrower to the facility agent of a Notice of Borrowing; and (ii) the issuance of the Borrower of a promissory note in favor of the fund facility Lender; that the promissory note to be issued shall cover the actual amount advanced from a particular funding facility Lender, which may not necessarily be for the whole amount of the Lender's credit commitment; and that the Borrower may issue one or more promissory notes to cover the amount actually drawn from time to time but not exceeding the maximum aggregate amount of the Lender's credit commitment. Based on the foregoing representations, you now request confirmation of your opinion that 1. The documentary stamp tax (DST) due on all the above-mentioned financing documents shall be based on the face value of each promissory note actually issued equivalent to the amount of the loan actually disbursed on each drawdown pursuant to an Omnibus Loan and Security Agreement, and no other DST shall be due on the other security agreements incorporated therein; 2. Despite the ruling requested above, the taxpayer may nevertheless voluntarily, upon initial drawdown or anytime thereafter but without any obligation to do so, pay the DST based on the maximum aggregate amount of the syndicated term loan under the Omnibus Loan and Security Agreement even when the promissory note then issued covers only the amount actually disbursed which may not necessarily be for the maximum amount of the funding facility or of the syndicated term loan. In reply thereto, please be informed that Section 179 of Republic Act (R.A.) No. 9243, amending Section 180 of the Tax Code of 1997, provides that "Section 179. Stamp Tax on All Debt Instruments . On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. xxx xxx xxx" The above-cited section was formerly Section 180 of the Tax Code of 1997 before it was renumbered and amended by R.A. No. 9243, Section 180 of the said Code was implemented by Revenue Regulations No. 9-94, which reads as follows: "Section 8. Loan Agreements/Promissory Notes secured by a Pledge/Mortgage . Where only one instrument was prepared, made, signed and executed to cover a loan agreement/promissory note, pledge/mortgage, the documentary stamp tax prescribed in Section 195 of the Tax Code, as amended, shall be paid and computed on the full amount of the loan or credited granted. In this regard, the instrument shall be treated as covering only one taxable transaction, subject to the higher documentary stamp tax. The above principle still holds true that the above-mentioned instrument shall be treated as covering only one taxable transaction subject to the higher tax, the tax shall be imposed on either the loan agreement or promissory note issued to secure the loan. In the instant case, SCBI may pay the tax on each promissory note that may be drawn pursuant to the Omnibus Loan and Security Agreement. In stressing the rationale of the above-mentioned rule, this Office elucidated the matter in BIR Ruling No. 137-98 dated September 24, 1998 , as follows: ". . . the execution of the Master Agreement is a taxable event subject to documentary stamp tax. In the instant case, however, the Master Agreement is not the loan contract itself but an undertaking which envisaged that the lender shall make available for the borrower a certain some of money at a given date which drawdown shall be covered by a loan agreement. Thus, where the subject matter of an agreement is to deliver something or money in this, it being a real contract, the same is not deemed perfected until after the object of the contract is delivered as provided for in Article 1316 of the Civil Code in relation to Article 1934 of the same Code, which provides, that 'Article 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the subject of the contract.' The drawdown is the delivery of the amount covered by the loan agreement for which a Note is also issued. Considering that the face value of the Note issued is equal to amount of the loan stated in the agreement and actually disbursed, the documentary stamp tax on such loan may be levied either on the loan agreement covering the amount so drawn at a particular dates, i.e., the amount of US$15,267,175.57 at the initial drawdown and each Note that may thereafter be issued there being no difference. Accordingly, pursuant to Section 180 of the Tax Code of 1997, this Office hereby holds that since the herein taxpayer categorically states that each Note shall correspond to the amount drawn as scheduled and stated in the contract, then the corresponding documentary stamp tax at the rate prescribed therein, shall be based on the face value of the said Note actually issued which is equivalent to the amount of the loan actually disbursed as of drawdown date." At this juncture, observation has to be made of the fact that only one instrument was prepared and executed to cover the loan agreements and other security agreements. Since there is only one taxable transaction, the tax shall be imposed on either the loan agreement or promissory note issued to secure the loan. Thus, SCBI may pay the tax on each promissory note that may be drawn pursuant to the Omnibus Loan and Security Agreement. Accordingly, the DST due on all the above-mentioned financing documents embodied in an Omnibus Loan and Security Agreement shall be based on the face value of each promissory note actually issued equivalent to the amount of the loan actually disbursed on each drawdown. Consequently, no other DST shall be due on the other security agreements incorporated therein. SHECcT WHEREFORE, in view of the foregoing , this Office hereby confirms your opinion that 1. The DST due on financing documents shall be based on the face value of each promissory note actually issued equivalent to the amount of the loan actually disbursed on each drawdown pursuant to an Omnibus Loan and Security Agreement, and no other DST shall be due on the other security agreements incorporated therein; and 2. SCBI may nevertheless voluntarily, upon initial drawdown or anytime thereafter but without any obligation to do so, pay the DST based on the maximum aggregate amount of the syndicated term loan under the Omnibus Loan and Security Agreement even when the promissory note then issued covers only the amount actually disbursed which may not necessarily be for the maximum amount of the funding facility or of the syndicated term loan. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service