BIR Ruling [DA-465-03]

December 5, 2003 BIR RULING [DA-465-03] 32; 34; UN-221-7-25-94; 270-87 DOWA Hightech Philippines, Inc . FCIE Barangay Langkaan Dasmarias, Cavite Attention: Mr . Hiroyuki Hosono Director Gentlemen : This refers to your letter dated October 10, 2002 requesting for a ruling as to whether or not you are required to pay income tax on your incurred Net Realized Forex Loss in the amount of P29,205,041.60. It is represented that DOWA Hightech Philippines, Inc. (Dowa) is an export Company located at the First Cavite Industrial Estate in Dasmarias, Cavite; that you are registered with PEZA as a pioneer enterprise in the production of lead frames and related products; that you are entitled to 6 years Income Tax Holiday from July 1995 to June 30, 2001; that now, you are already subject to 5% gross income tax in lieu of local and national taxes; that your parent company in Japan, Dowa Mining Co., Ltd., (Japan-Dowa) granted you loans in January 30, 1995 in the amount of US$1,612,090.69 which is due for payment on January 30, 2004 and in December 11, 2001 in the amount of US$12,330,000.00 which is due for payment on December 11, 2002; that the 1st loan was originally recorded in your books in January 1995 at a rate of P24.237/$ which is equivalent to P39,072,570.00; that on the other hand, the 2nd loan was originally recorded in your books in December 2001 at a rate of P51.959/$ which is equivalent to P640,654,470.00; that every December of each year you are restating your loans to conform with the year end dollar to peso exchange rate; that exchange differences are being recorded as unrealized forex gain or loss in each year; that in order to improve the Company's financial situation, a portion of the loans were converted to additional paid-in capital in July 5, 2002 as follows: Original Peso Value of $ to P Loans Based Realized Forex Loan Amount rate Equivalent On the $ to P Gain (loss) as Balance Loan Converted to as of Peso Value Rate at A Result of After Amount APIC in July 5, As of the Date of Conversion to Conversion In US$ US$ 2002 July 5, 2002 Availment APIC in Peso in US$ 1st Loan 1,612,090.69 1,612,090.69 50.511 81,428,312.84 39,072,570.00 (42,355,742.84) 0.00 2nd Loan 12,330,000.00 9,081,976.00 50.511 458,739,689.74 471,890,390.98 13,150,701.24 3,248,024.00 Total 13,942,090.69 10,694,066.69 540,168,002.58 510,962,960.98 29,205,041.60 3,248,024.00 ============ =========== ====== ============= ============= ============= =========== In reply, please be informed that the conversion into paid-in capital of the said loan from Japan-Dowa which constitutes additional capital contribution on the part of the latter is a capital investment not within the purview of the term taxable income as defined in Section 32 in relation to Section 34 of the Tax Code of 1997. Hence, the debt-to-equity conversion is not subject to income tax. (BIR Ruling UN-221-7-25-94 citing BIR Ruling No. 270-87 dated September 8, 1987) 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. STaHIC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group