BIR Ruling [DA-237-04]

May 7, 2004 BIR RULING [DA-237-04] 173; R.A. 7227; DA-107-2001 Omron Mechatronics of the Philippines Corporation Subic Techno Park, Boton Area, Subic Bay Freeport Zone 2222, Philippines Attention: Ms. Lyn Amor R. Doble Deputy Admin. Manager Gentlemen : This refers to your letter dated July 31, 2002 requesting for confirmation of your opinion that the increase of capital stock and/or loan agreement entered into by Omron Mechatronics of the Philippines Corporation with Omron Asia Pacific, Pte. Ltd. or to any non-resident foreign corporation is exempt from documentary stamp tax. It is represented that Omron Mechatronics of the Philippines Corporation is a corporation duly registered with the Securities and Exchange Commission under SEC Registration No. A1997-2406. It is registered with the Subic Bay Freeport enterprise and was granted a Certificate of Registration and Tax Exemption No. 97-0011 on March 10, 2002. Omron Asia Pacific, Pte. Ltd., on the other hand, is a non-resident foreign corporation duly organized under the laws of Singapore. Omron Mechatronics of the Philippines entered into an agreement with Omron Asia Pacific Pte. Ltd, to borrow a specified amount of finances for additional working capital and acquisition of machineries and equipment. As a Subic Bay Freeport registered enterprise, Omron Mechatronics of the Philippines has availed of the 5% preferential tax rate granted under Republic Act No. 7227, as amended, in lieu of all national and local taxes. Hence, it is exempt from the payment of documentary stamp tax. In reply, please be informed that Section 12(c) of Republic Act No. 7227, as amended, otherwise known as the Bases Conversion and Development Act of 1992, provides that, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu thereof, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the national government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within Subic Special Economic Zone to be utilized for the development of the municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas. This exemption from the payment of national internal revenue taxes is reiterated in Section 43, Chapter V(A) of the Rules and Regulations Implementing Republic Act No. 7227, as amended, and implemented through BIR Revenue Regulations No. 16-99. Considering that Omron Mechatronics of the Philippines Corporation, a Subic Bay Freeport registered enterprise, is liable for the preferential tax rate of 5% on its gross income earned, in lieu of all local and national taxes, 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. DA-107-2001 dated 1 June 2001) 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. Consequently, Omron Mechatronics of the Philippines Corporation's contracting party is liable to pay the documentary stamp tax on these documents. However, since Omron Mechatronics of the Philippines Corporation's contracting party is a non-resident foreign corporation or entity with no permanent establishment in the Philippines and not engaged in business herein, 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, the aforementioned loan agreement is a transaction which does 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group