BIR Ruling [DA-381-98]

August 24, 1998 BIR RULING [DA-381-98] Caltex (Philippines), Inc. 6/F Ayala Avenue 1226 Makati City Attention: Mr . Ruben T . Umali General Manager-Treasury and Atty . Catherine T . Manahan Counsel Gentlemen : This refers to your request for a ruling on the specific tax implications of interest rate swaps particularly with regard to the application of the gross receipts tax, the documentary stamp tax (DST) and the value-added tax (VAT). It is represented that Caltex (Philippines), Inc. (CPI), a domestic oil company, entered into an Interest Rate Swap Agreement (Agreement) with a Counterparty Bank (CB) in order to cushion the impact of potential increases in floating interest rates of its foreign loan by exchanging them for a fixed interest rate with a CB. Under the Agreement, there are three possible scenarios: LLphil 1. CPI pays its Lending Bank a floating interest rate for its loan. CPI pays CB fixed interest while CB pays CPI the floating interest rate. The excess of the fixed over the floating interest rates represents the bank spread or fee of the CB. 2. CPI pays its Lending Bank a floating interest rate. CPI pays CB fixed interest rate while CB pays the CPI the floating interest rate. The excess of the floating over the fixed interest rates represents a gain to CPI. 3. CPI pays its Lending Bank a floating interest rate. CPI pays CB fixed interest rate while CB pays CPI the floating interest rate. The fixed and the floating interest rates equal yield no income nor spread to CPI and CB, respectively. In reply, please be informed that the gross receipts tax (GRT) under the first scenario shall be based on the swap fee portion of the net settlement paid to CB. No GRT is imposed under the second scenario but CPI here will recognize income from the gain and pay ordinary corporate income tax thereon. Under the third scenario, no GRT nor income tax will accrue as neither of the parties will gain. With regard to the application of the VAT, the coverage of the banks and other financial intermediaries by the expanded VAT will only take effect on January 1, 1999 under Republic Act No. 7716, as amended by R.A. No. 8241 (Sec. 5, R.A. No. 8424). In the event that it takes effect, no VAT is due on the foreign-currency-denominated swap fee of the CB. Otherwise, if the swap fee is in local currency, then, the CB is liable to pay VAT on such receipt. As far as the DST is concerned, the Agreement embodying the interest swap is not a loan but merely an exchange of cash flows between the parties. (BIR Ruling No. 146-95 dated September 19, 1995) Neither does this instrument fall under any of the enumerated document, contract or agreement that is subject to a specific DST rate to which Section 198 of the Tax Code, as amended, can be correlated. Hence, no DST is due on the Agreement. 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. cdta Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)