BIR Ruling [DA-452-06]

July 25, 2006 BIR RULING [DA-452-06] R.A. 7103; 118-96; DA-696-99 Romulo Mabanta Buenaventura Sayoc and De Los Angeles 30F Citibank Tower 8741 Paseo de Roxas Makati City Attention: Attys. Owen S. Carsi Cruz Jayson L. Fernandez and Evelyn O. Kho Gentlemen : This refers to your letter dated December 7, 2005, requesting on behalf of your client, Steel Corporation of the Philippines (SCP), for a ruling to confirm your opinion that the interest income from restructured loans as well as the redemption premium from Redeemable Notes obtained by SCP from local and foreign banks/financial institutions by virtue of a restructuring/Omnibus Agreement is exempt from all national internal revenue taxes, including income tax, value added tax and gross receipts tax, pursuant to Section 6(E) of Republic Act (RA) No. 7103, otherwise known as the Iron and Steel Industry Act. STIHaE It is represented that SCP is a domestic corporation duly organized and existing under Philippine laws; that it was registered with the Securities and Exchange Commission (SEC) on October 3, 1994 and with the Board of Investments (BOI) as a new producer of flat products on a pioneer status effective December 18, 1995; that it is a holder of Certificate of Eligibility under RA 7103; that to partially finance the construction of its plant, SCP obtained peso denominated loans from local commercial banks under the JEXIM III program of the Development Bank of the Philippines (DBP), and foreign-currency denominated debts from local commercial banks and foreign financial institutions and that all debts have a term of seven (7) years including a three (3) year grace period; that SCP was unable to make timely payments on principal, interest, and penalties under the agreements; that on June 30, 2003, SCP and the lenders entered into a restructuring agreement (the "Omnibus Agreement''), wherein the payment for past due principal on the outstanding loans was rescheduled into a ten-year term loan ("Tranche A") and twelve-year term loan ("Tranche B"), respectively; that the payment for the accrued and unpaid interest as of June 30, 2003, approximately amounting to PhP779,017,756.81 and US$2,827,138.87 was likewise rescheduled (the "Rescheduled Interest"); and that the Rescheduled Interest was converted into a long term note (the "Redeemable Notes") to be redeemed by SCP at any time beginning on the fifth year but not later than the seventh year from effectivity date, at a redemption premium. In reply, please be informed that Section 6(e) of RA 7103, otherwise known as the Iron and Steel Industry Act provides as follows: "Section 6. . . . (e) Other loans The certified enterprise shall be authorized to contract; subject to the prior approval of the Central Bank of the Philippines, such loans, credit and indebtedness, from time to time and in any convertible foreign currency or capital goods, from foreign private financial institutions or fund sources as may be necessary to undertake the manufacturing activity described in Section 5(b) above. The Central Bank of the Philippines shall give priority to the applications made by certified enterprises to foreign currency loans, debt asset and debt-equity conversion and such other transaction as may receive the approval of the Central Bank of the Philippines. The government shall likewise encourage private financial institutions, whether domestic or foreign, to extend loans for equity investments of Philippine nationals in a certified enterprise. The interest income from loans with maturity of five (5) years or more extended by financial institutions shall be exempt from all national internal revenue taxes. " (Emphasis ours) In connection with the original loan, this Office in BIR Ruling No. 118-96 dated November 4, 1996 ruled that: "Based on the foregoing, and since Steel Corporation of the Philippines is a holder of Certificate of Eligibility under the provisions of RA 7103, interest income from loans with maturity of five (5) years or more extended by domestic and foreign financial institutions to it shall be exempt from all national internal revenue taxes. Accordingly, we confirm your opinion, that: 1. Interest income derived by RCBC, ABC, CBC, LBP, CTBC and EBC from Philippine currency loans under DBP's JEXIM III program with maturity of more than five (5) years, granted to Steel Corporation of the Philippines shall be exempt from the 35% corporate income tax imposed under Sections 24 (a) (1) and 25 (a) (1) of the Tax Code, as well as the percentage tax on gross receipts of banks and non-bank financial intermediaries under Section 119 of the Tax Code, as amended; 2. Interest income derived by CBC, LBP, CTBC and EBC from foreign currency loans granted under the Expanded Foreign Currency Deposit system, with maturity of more than five (5) years, granted to Steel Corporation of the Philippines shall be exempt from the 10% final tax imposed under Sections 24(e)(3) and 25(a)(6)(B) of the Tax Code, as amended; and ISCcAT 3. Interest income derived by AFIC from foreign currency denominated loans granted to Steel Corporation of the Philippines shall be exempt from the 20% final withholding tax on foreign loans imposed under Section 25(b)(5)(A) of the Tax Code or the applicable rate imposable under the provisions of the RP-Singapore Tax Treaty. Consequently, since the said interest income is not subject to Philippine tax, Steel Corporation of the Philippines is not required to withhold the tax on said income." The Omnibus Agreement merely restructures the unpaid principal and interest arising from the loan previously obtained by SCP from the lenders to partially finance the construction of SCP's plant. Since the interest income on the original loan subject of the Omnibus Agreement is tax-exempt, the interest due on the restructured loan embodied in the Omnibus Agreement, not being an independent agreement, shall remain tax-exempt. (BIR Ruling No. 213-88 dated May 25, 1988) Accordingly, this Office is of the opinion as it hereby holds that: 1. Interest income derived by the banks from Philippine currency Tranche A and Tranche B loans under the Omnibus Agreement with maturity of more than five (5) years is exempt from the (a) corporate income tax imposed under Sections 27(A) and 28(A) of the 1997 Tax Code, as well as the percentage tax or value-added tax, whenever applicable, on gross receipts of banks and non-bank financial intermediaries; 2. Interest income derived by the banks from foreign currency denominated Tranche A and Tranche B loans under the Omnibus Agreement with maturity of more than five (5) years shall be exempt from the 10% final tax imposed under Sections 27 (D)(3) and 28(A)(7)(b) of the Tax Code of 1997; and 3. Redemption premium accrued by the banks from Philippine currency denominated Redeemable Notes as a result of the restructuring of the unpaid interest is exempt from the (a) corporate income tax imposed under Sections 27(A) and 28(A) of the 1997 Tax Code; (b) percentage tax, or value-added tax, whenever applicable, on gross receipts of banks and non-bank financial intermediaries. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service