BIR Ruling [DA-340-06]

May 26, 2006 BIR RULING [DA-340-06] S179; RR 13-04; 218-90; 188-99 SGV & Co 6760 Ayala Avenue Makati City Attention: Atty. Romulo S. Danao, Jr. Partner Gentlemen : This refers to your letter dated March 10, 2006 requesting for a confirmation of your opinion that the proposed revision of the payment terms of the loan agreement between Philippine Diamond Hotel and Resort, Inc . (Diamond) and Philippine Oriental Realty Development, Inc. ("Oriental") as debtors, and Triluck Finance Limited ("Triluck") as creditor will not be subject to documentary stamp tax ("DST"). It is represented that Diamond and Oriental ("Borrowers") have loans payable to Triluck. However, as the borrowers have encountered financial difficulties, the parties are contemplating on revising the payment terms of the loan. Specifically, Triluck will allow a moratorium on interest for an agreed period and will only require the borrowers to pay amortizations on the principal during the moratorium period. However, after the expiration of the moratorium period, the borrowers will start to pay interest including the accrued interest for the previous years until the loans are fully paid ("Proposed Revision"). Further, you posit that since the Proposed Revision will merely change the terms of payment of the loan and will not on every point be incompatible with the provisions of the agreement, the same will not impliedly novate said loan agreement. Neither will the Proposed Revision expressly novate the loan agreement as there is no express stipulation nor intention by the parties to novate the same. In short, the Proposed Revision will not create a new loan agreement between Triluck and the borrowers. In reply, please be informed that Section 179 of the Tax Code as amended by Republic Act No. 9243 (RA No. 9243) provides: "Section 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), 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. cHCIEA For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of contract is located or used in the Philippines, instruments and securities issued by the government of any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." [ Underlining supplied ] Moreover, Section 5 of Revenue Regulations (RR) No. 13-04, which implements the above section, also provides that the DST is imposed on every original issue of debt instruments and the tax shall be based on the issue price thereof: "Section 5. New Rate of DST on All Debt Instruments. xxx xxx xxx The DST on all debt instruments shall be imposed only on every original issue and the tax shall be based on the issue price thereof. xxx xxx xxx." It is clear from Section 179 and RR No. 13-04 that the DST is imposed only on every original issue of debt instruments. Thus, the DST will apply only if the Proposed Revision will extinguish the existing loan agreement and result in an entirely new contract or agreement between Triluck and the borrowers. Conversely, if the loan agreement is not extinguished, DST will not apply. In the instant case, the Proposed Revision will not expressly novate the loan agreement as there is no express stipulation nor intention by the parties to novate the agreement. Neither will the Proposed Revision impliedly novate the loan agreement as it will merely change the terms of payment of the loan and will not be incompatible with the provisions of the agreement. Thus, the Proposed Revision will not create a new loan agreement between Triluck and the borrowers for which DST is payable. In several occasions, this office had the opportunity to rule on the issue of novation in relation to the application of DST. Thus, in instances such as a change of pledge or pledgors ( BIR Ruling No. 18-99, dated November 29, 1999 ), or the mere additional collateral as supplementary security to a contract of loan ( BIR Ruling Nos. 218-90, dated November 22, 1990 & UN-230-95, dated June 26, 1995 ), the original loan agreement is neither extinguished or replaced as the same are mere additional obligations not incompatible with the original loan, hence, no DST is payable in those instances. Such being the case, your opinion that the above proposed revision of the payment terms of the loan agreement between Philippine Diamond Hotel and Resort, Inc. and Philippine Oriental Realty Development, Inc., as debtors, and Triluck Finance Limited, as creditor, will not be subject to DST is hereby confirmed. 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. Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service