BIR Ruling [DA-208-99]

April 5, 1999 BIR RULING [DA-208-99] Smart Communications, Inc. Rufino Pacific Tower 6784 Ayala Avenue Makati City Attention: Atty . Rene G . Baez Director Gentlemen : This refers to your letter dated February 9, 1999 requesting for a ruling to the effect that the conversion into common shares of the convertible bonds issued by Smart Communications, Inc. (hereinafter referred to as "Smart") pursuant to a contract entered into by the bondholders, is not subject to another documentary stamp tax. It is represented that pursuant to a contract for the acquisition of convertible bonds, Smart issued convertible bonds to three bondholders, namely, Nippon Telegraph Telephone Corporation (NTT), Metro Pacific, Corp. (MPC) and Asia Link B.V. (ALBV) with aggregate face value of Php 6,897,152,000.00; that one of the rights available to the convertible bondholders at the time when Smart issued the said bonds is the right to convert, at the option of the bondholder, said bonds to common shares; and that the corresponding documentary stamps had been paid at the time the convertible bonds were issued. In reply, please be informed that pursuant to Sections 174 and 176 of the Tax Code of 1997 in relation to Section 173 thereof, a documentary stamp tax of One peso and fifty centavos (P1 . 50) on each Two hundred pesos (P200), or fractional part thereof, is levied and collected on debentures and certificates of indebtedness or obligations or shares of certificates of stock and upon acceptances, sales and transfers of the obligation, right or property incident thereto, and in respect of the transaction so had or accomplished, provided however, that only one tax shall be collected on each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer . Thus, while DST is levied on the instrument, it is actually a tax on the privilege to enter into transaction, hence, it is neither a tax on the transaction per se (Azarraga vs. Rodriguez, 9 Phil. 637) nor on the property it describes (Commissioner vs. Head Lumber Company, 10 SCRA 372). In the instant case, the NTT, MPC and ALBV had previously entered into a contract for the acquisition of convertible bonds with Smart. One of the rights available to the convertible bondholder at the time Smart originally issued the said bonds, is the right to convert, at the option of the bondholder, said bonds to common shares. Considering therefore, that the corresponding DST had been previously paid, i.e., at the time the convertible bonds were issued, the mere exercise of the right to convert said bonds into common shares duly granted under the contract without a corresponding change of ownership will negate payment of another DST. Accordingly, the conversion of convertible bonds into shares duly granted under the contract, which does not entail any transfer of ownership to another bondholder but to itself alone, is not a transaction distinct from the original contract but a mere continuation of the initial transaction which was previously enter into and for which the required documentary stamp tax was already paid. (BIR Ruling No. 158-98 dated November 10, 1998) casia This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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 & Enforcement Group