SGV & Co.

May 10, 2007 BIR RULING [DA-297-07] DA-182-01 DA-026-05 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. R. C. Vinzon Tax Services Gentlemen : This refers to your letter dated February 15, 2007 stating that your client, Radio Communications of the Philippines, Inc. (RCPI), seeks the restructuring of its debts and suspended payments of all principal amortizations, that the debt restructuring plan presented to the creditors included, among others, the extension of repayment terms of RCPI's outstanding loans and bonds, reduction in interest rates and the conversion of certain debt into equity; and that RCPI is the grantee of a legislative franchise under Republic Act (RA) No. 3259, as amended by R.A. Nos. 4905 and 7633. Based on the foregoing representations, you now request confirmation of your opinion that the debt restructuring scheme to be implemented by its creditors is not subject to documentary stamp tax. In reply thereto, please be informed that Section 11 of RA 7633 provides that "SEC. 11. The grantee, its successors or assigns shall be liable to pay the same tax on their real estate, buildings and personal property exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, that the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. The grantee shall submit a detailed report to the Congress of the Philippines with respect to its program, operations, accounts, and payment of taxes and compliance with the terms and conditions of its franchise." ETCcSa The phrase " in lieu of all taxes " has already been ruled by this Office in BIR Ruling No. DA-272-00 dated June 28, 2000 , as follows ". . . after paying a franchise tax equivalent to 5% of all gross receipts of the telephone or other telecommunication business covered by its franchises, it may not be required to pay the documentary stamp tax imposed under Title VII of the Tax Code of 1997, on various documents, papers and instruments executed by it which are necessary in the conduct of its business covered by the franchise. However, pursuant to Section 173 of the Tax Code of 1997, 'whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax'. In other words, since PLDT is enjoying tax exemption by virtue of the " in lieu of all taxes" provision of its legislative franchise, the other party to the taxable document shall be directly liable to pay the tax. (DA BIR Ruling No. DA-234-97 dated July 1997) . xxx xxx xxx There can be no uncertainty that RCPI is not subject to DST on the implementation of its rehabilitation plan because of the ' in lieu of all taxes ' provision in its legislative franchise. However, pursuant to the above-mentioned ruling and in relation to Section 173 of the Tax Code of 1997, it seems that the creditors of RCPI will be the one liable for the aforesaid DST imposed under Section 179 of the Tax Code of 1997, as amended by Section 5 of R.A. No. 9243, which provides that "SEC. 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 (P200.00), or fractional part thereof, of the issue price of any such debt instruments: 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." (emphasis supplied) The rehabilitation plan does not constitute a new issuance of debt instrument between the creditors and the debtor, as held in BIR Ruling No. DA-182-01, dated May 8, 2001 * "A documentary stamp tax is an excise tax imposed on the privilege of entering into transactions, rather than on the document. Hence, being an excise tax, it is paid only once even when there are various or series of documentation to be followed as long as there is only one transaction involved. But the liability to the tax and the amount thereof are determined from the facts of the document itself. (BIR Ruling No. 520-93 dated December 27, 1993, BIR Ruling No. 084-97 dated July 29, 1997, BIR Ruling No. DA-565-12-16-98) " Moreover, Section 198 of the Tax Code of 1997, as amended by R.A. No. 9243, provides that "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 rates as that imposed on the original instrument." After careful scrutiny of the above-mentioned provision, it becomes apparent that neither can the implementation of the rehabilitation plan be construed as a renewal or continuance of any loan agreement. For this purpose, the approval of the rehabilitation plan is the only single document that is to be followed by the creditors and the debtor which provides the details of payment of the restructured debt and is binding on all the parties named in such instrument. Accordingly, there is no further agreement or instrument to be executed by RCPI and its creditors upon which to impose DST. This has been ruled upon squarely in BIR Ruling No. DA-026-05, dated January 24, 2005 , as follows "As can be gleaned from the above-cited sections, the rehabilitation plan does not constitute a new issuance of debt or renewal or continuance of any loan agreement between the creditors and debtor but a single document. The rehabilitation plan provides the details of payment of the restructured debt and is binding on all the parties named in such instrument. Accordingly, there is no further agreement or instrument to be executed by Bayantel and its creditors upon which to impose the corresponding documentary stamp tax." IN VIEW OF THE FOREGOING, this Office hereby confirms your opinion that the implementation of the debt restructuring and rehabilitation plan is not subject to DST, either for RCPI or for its creditors. 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. CASTDI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service