Smart Communications, Inc.

May 16, 2008 BIR RULING [DA-297-08] 121; RR 12-80; 9-2004; 024-96 Smart Communications, Inc. Smart Tower, 6799 Ayala Avenue Makati City Attention: Ms. Rina R. Manuel Senior Tax Manager Gentlemen : This refers to your letter dated August 25, 2004, requesting confirmation of your opinion that in case of pretermination of a loan, the recomputation of gross receipts tax ("GRT") shall be in accordance with the law in force and effective at the time of the interest payment. It is represented that Smart Communications, Inc. (SMART), is a domestic corporation incorporated in 1991, is engaged in the business of telecommunications with principal office at Smart Tower, Ayala Avenue, Makati City. On June 14, 2001, with the plan of raising funds to finance capital expenditures, SMART (as the "Borrower"), entered into a Loan Agreement ("the Agreement") amounting to One Billion Pesos (Php1,000,000,000) with several banking institutions (collectively referred to here as "the Lenders" ), and Citibank, N.A. as "the Facility Agent". Under the said Agreement, the term of the loan is four (4) years and six (6) months, or from June 2001 to December 2005 with a fixed interest rate of 12.81% per annum. The Agreement provides, however, that Smart shall shoulder and pay the GRT due on interest payments to the Lenders. On various dates in the years 2001 and 2002, SMART actually paid interest and the corresponding GRT due thereon based on the rates prescribed under Section 121 of the NIRC (prior to R.A. No. 9238) that is: (a) short term maturity (not in excess of 2 yrs) 5%; (b) medium term maturity (over 2 yr. but not exceeding 4 yrs.) 3%; (c) long term maturity (over 4 yrs. but not exceeding 7 yrs.) 1%; and (d) (over 7 yrs.) 0%; For taxable year 2003, all interest payments made by SMART under the Agreement were subjected to value-added tax (VAT). On June 28, 2004, SMART preterminated the Agreement, repaid the loan principal and paid the interest and GRT due thereon. On account of the pretermination, the Lenders recomputed the GRT due in accordance with the GRT rates under Section 121 of the NIRC of 1997, as amended, to wit: aHcACI (a) maturity period 5 yrs. or less 5%; and (b) maturity period more than 5 yrs. 1%; that the Lenders eventually billed and charged Smart the recomputed GRT due on interest payments made in years 2001 and 2002, referred to as the "GRT Claw Back", in accordance with Section 121 of the NIRC, as amended by R.A. No. 9238. In reply, please be informed that Section 121 of the NIRC of 1997, as amended by R.A. No. 9238 (An Act Amending Certain Sections of the National Internal Revenue Code of 1997, as amended, by Excluding Several Services from the Coverage of the Value-Added Tax and Re-Imposing the Gross Receipts Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-Banking Functions and Other Non-Bank Financial Intermediaries Beginning January 1, 2004), provides as follows: "SEC. 121. Tax on Banks and Non-bank Financial Intermediaries. "There shall be collected a tax on gross receipts derived from sources within the Philippines . . . in accordance with the following schedule: (a) On interest, commissions, and discounts from lending activities as well as income from financial leasing, on the basis of the remaining maturities of instruments from which such receipts are derived: Maturity period is five (5) years or less 5% Maturity period is more than five (5) years 1% (b) . . . (c) . . . (d) . . . Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for the purposes of classifying the transaction as short, medium or long-term and the correct rate of tax shall be applied accordingly. EHaASD xxx xxx xxx" The above provision is the basis for the GRT on banks. Notably, the amendment under R.A. No. 9238 mainly involved the revision of the various classifications of the maturity period (that is, short, medium or long-term) to either 5 years and below or more than 5 years. Under said provision, in case the maturity period of the instrument from which interest is derived is shortened through pretermination, the maturity shall be reckoned to end as of the date of the pretermination for purposes of classifying the transaction as short, medium or long term, and applying the correct GRT rate. (BIR Ruling No. 024-96 dated February 22, 1996) The significance of the date of pretermination is to adjust the maturity period for purposes of applying the correct GRT rate, as if the revised maturity period were the original maturity period. Moreover, although the banks and non-bank financial intermediaries are directly liable for the gross receipts tax, by agreement, however, the burden of shouldering the GRT may be shifted by the bank to its borrower, as in the present case when SMART agreed to shoulder the GRT with respect to the Agreement. While the term "gross receipts" for purposes of the gross receipts tax on banks should be interpreted and applied in its plain and ordinary meaning, the interest income (of banks) is taxable for gross receipts tax purposes only upon actual receipt, and the same shall form part of their "tax base upon which the gross receipts tax is based." (China Banking Corporation vs. Court of Appeals, G.R. No. 146749, June 10, 2003, RR No. 12-80). The concept of GRT is based on the definition of "gross receipts", that is, based on "actual or constructive receipt" of income. Accordingly, the GRT due should also be computed, or recomputed in case of pretermination, based on the rates prescribed at the time of income payment. TaHDAS It is also noteworthy that R.A. No. 9238, which was approved on 5 February 2004, shall take effect only beginning 1 January 2004. Therefore, only interests, commissions and discounts paid beginning January 1, 2004 shall be subject to provisions of R.A. No. 9238, or to the new GRT rates imposed under Section 121 of the NIRC of 1997, as amended. Like other statutes, unless the purpose of the legislature to give retrospective effect is expressly declared or may be implied from the language used, tax laws operate prospectively whether they enact, amend or repeal. (Philippine Education Co. v. Commissioner, CTA Case No. 703, September 20, 1965 citing Lorenzo v. Posadas, Jr., etc.). Accordingly, this is to confirm your opinion that, in the case of pretermination of the loan, the GRT recomputation should be in accordance with the law in force at the time of the actual interest payment. As such, the GRT due on interest payments made by Smart in the years 2000 and 2001 should be recomputed based on rates prescribed under Section 121 of the NIRC prior to the amendments made under R.A. No. 9238. Corollarily, the GRT due on interest payments made in year 2004 should be recomputed based on the rates prescribed under Section 121 of the NIRC, as amended by R.A. No. 9238. 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