Aranas Consunji & Barleta Law Office

June 24, 2008 BIR RULING [DA-378-08] Sec. 179; RR 9-94; DA-381-08-24-98, 146-95 Aranas Consunji & Barleta Law Office Unit 106 G/F Le Metropole Condominium Tordesillas Corner Dela Costa Streets, Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated June 12, 2008, requesting on behalf of your client, Prime Orion Philippines Inc. ("POPI"), confirmation of your opinion that the execution of a compromise agreement to document and effect the terms of a previously agreed upon condonation of its loan, from one of its creditors, is not subject to documentary stamp tax. It is represented that POPI is a corporation duly organized and existing under and by virtue of Philippine laws. It is a publicly listed holding company with principal address at 20/F LKG Tower, Ayala Avenue, Makati City; that for taxable year ended June 30, 2007, POPI has reflected a capital deficit position; that considering that the liabilities have remained unpaid, POPI has offered a compromise settlement with the said third party creditor; that out of the total liability, POPI offered to pay a compromise settlement and requested the cancellation and condonation of the remaining portion of the maturity value of the loan plus accrued interests; that the income tax implication of the said condonation was properly addressed in BIR Ruling No. DA-342-2008 issued on June 4, 2008; that as and by way of documenting and effecting the approved condonation, the parties will execute a compromise agreement that will specify the new terms of payment; that on the basis of the foregoing, you respectfully request confirmation that the execution of a compromise agreement to document and effect the terms of a previously agreed upon condonation of a loan by POPI, from one of its creditors, is not subject to documentary stamp tax. In reply, please be informed that Section 179 of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9243, 1 provides: "Sec. 179. Stamp Tax on All Debt Instruments . On very original issue of debt instruments, there shall be collected a documentary stamp tax on One Peso (P1.00) on each two hundred pesos (P200), or a fraction 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." The above-quoted provision enumerates the type of documents subject to DST on loan agreements. Revenue Regulations (RR) No. 9-94, defined such documents as follows: ''Loan agreement refers to a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings." In the case of POPI, the compromise agreement is not in the nature of a loan agreement, but is executed precisely to effect the payment of terms embodied in a loan agreement. Since POPI did not execute any document that may be considered as a loan agreement to which the tax under Section 179 of the Tax Code, as amended, is imposed, and since a compromise agreement is not one among those instruments falling under any of the documents enumerated under the Tax Code that are subject to a specific DST, then the said compromise agreement which provides for the new terms and conditions of payment of an original loan, shall not be subject to documentary stamp tax (BIR Ruling No. 146-95 dated September 19, 1995 and BIR Ruling No. DA-381-08-24-98 dated August 24, 1998). Accordingly, the execution of a compromise agreement to document and effect the terms of a previously agreed upon condonation of a loan by POPI, from one of its creditors, is not subject to documentary stamp tax. 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 as represented are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Implemented by Revenue Regulations No. 13-04.