BIR Ruling [DA-247-05]

June 8, 2005 BIR RULING [DA-247-05] Memo-011-2002; 017-02; 026-02 Asian Development Bank 6 ADB Avenue Mandaluyong City Attention: Asst. Gen. Counsel Fong Chin Choon Office of the General Counsel Gentlemen : This refers to your letter dated March 28, 2005 requesting for ruling on the taxability of the peso-denominated bonds that will be issued by the Asian Development Bank (ADB) relative to its peso lending and investment operations in the Philippines. As represented, ADB is an international organization established in 1966 and operates under the Agreement Establishing the Asian Development Bank (the "ADB Charter") which is binding upon the member countries that are its shareholders. The Philippines is one of the founding members of ADB and one of the first signatories to the ADB Charter. The ADB Charter was ratified by the Senate of the Philippines (S.R. No. 6, adopted 16 March 1966, 6th C.R.P.).As a multilateral development Bank, the purpose of the ADB is to foster economic growth and cooperation in Asia and the Pacific region and to contribute to the economic development of the developing member countries in the region collectively and individually. Its principal office is located in Metro Manila, Philippines. Additionally, ADB, as an international organization, is considered as a State or a "super-State" possessing rights, duties, privileges and immunities conferred to it under its Charter and as such, it is not considered to be a resident of any country. This being the case, ADB cannot be considered a resident of the Philippines for tax purposes. At present, ADB is working with the Department of Finance (DOF) and other government agencies, including the Bureau of the Treasury and the Bangko Sentral ng Pilipinas, to obtain the required approvals for the proposed bond issue. As requested by the Bureau of the Treasury, ADB was required to obtain a ruling on the following propositions. 1. ADB and its paying agents for the bond issue are not required to withhold any tax on interest payments or discounts received by the holders of the ADB Bonds; 2. ADB's bond issue is a transaction exempt from documentary stamp tax (DST).Consequently, ADB and the original purchasers of the bonds are not required to pay DST; and 3. The secondary trading of the ADB bonds is not subject to DST. In reply, please be informed as follows: 1. ADB is accorded certain rights, immunities and privileges among which is the immunity from taxation as found in Article 56(1) of its Charter which provides that: "The Banks, its assets, property, income and its operations and transactions, shall be exempt from all taxation and from all customs duties. The bank shall also be exempt from any obligation for the payment, withholding or collection of any tax or duty ." (Underscoring supplied) Thus, apart from its immunity from taxes, the Charter provides for ADB's exemption from the obligation to withhold taxes. CTHDcS In view of the foregoing exemption under Article 56(1) of the ADB Charter, the ADD should not be required to withhold any tax on interest income that the bondholders shall earn from the Bonds. This exemption from the obligation to withhold shall extend to paying agents acting for and on behalf of ADB with respect to the Bonds. The rationale for this is that the paying agent acts merely as an agent of ADB. Imposing the same withholding obligation on the paying agent would violate ADB's exemption from any obligation to withhold under Article 56(1) of the ADB Charter. 2. As stated in Article 56(1) of the ADB Charter, "the Bank, its assets, property, income and its operations and transactions , shall be exempt from all taxation and from all customs duties." This has to be interpreted to mean that transaction that may be made by ADB is also exempt from taxation imposed under the Tax Code. Consequently, whoever may be the party involved in the transaction entered by ADB, no DST can be imposed thereof. Thus, where ADB is a party to a transaction, the transaction itself is exempt from DST. Therefore, the provision of Section 173 of the Tax Code which shifts to the other party the payment of DST shall not apply as there is no instance that DST may be imposed on any transaction entered into by ADB pursuant to the aforementioned Section 56(1) of the ADB Charter. In view of the foregoing, the issuance of bonds by ADB shall be exempt from the DST imposed under Section 180 of the Tax Code, as amended by R.A. No. 9243. 3. As consistently held by this Office, issuance of bonds in the secondary market is no longer subject to DST. The transfer of the Bonds in bearer form in the secondary market by way of simple delivery to the buyer is not subject to DST unless the transfer of the instrument carries with it a renewal or issuance of new instruments in the name of the transferee to replace the old ones ( BIR Ruling No. 026-02 dated June 27, 2002; BIR Ruling No. 050-01 dated October 29, 2001 ). The provision of Section 198 of the Tax Code of 1997, as amended, which imposes DST on assignments and renewals of certain instruments, to wit: SEC. 198. Stamp Tax on Assignments and Renewals of Certain Instruments. Upon each and every assignment or transfer of any mortgage, lease or policy of insurance, or the renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness by altering or otherwise, there shall be levied, collected and paid a documentary stamp tax, at the same time as that imposed on the original instrument. does not apply in secondary trading of bonds since the financial market (primary or secondary) does not change the tenor of bonds originally issued. The investing public who made the indirect investment in the secondary market merely substitute the original lender. ScaATD 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group