BIR Ruling [DA-485-98]

November 10, 1998 BIR RULING [DA-485-98] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . J . A . Osana Partner Tax Division Gentlemen : This refers to your letter dated October 1, 1998 requesting for a ruling that under the facts represented hereunder, your client can pay its documentary stamp tax (DST) liability with Tax Credit Certificate (TCC) issued in its name. It is represented that your client, Fujitsu Computer Products Corporation of the Philippines (Fujitsu), is a domestic corporation 100% owned by Fujitsu Ltd., of Japan; that it is registered with the Philippine Export Processing Zone Authority (PEZA) under Certificate of Registration No. 95-35 dated March 23, 1995 as an Export Enterprise; that it is primarily engaged in the manufacturing, assembling, processing and exporting of computer products, electrical and electronic equipment, as well as component parts and accessories thereof; that as such, it enjoys the benefit of Income Tax Holiday (ITH) since January 1, 1996 until December 31, 2002; that as a consequence of its being a 100% exporter, it was granted a Tax Credit Certificate (TCC) SN 018742 dated February 4, 1998, amounting to Sixty Eight Million Pesos (P68,000,000.00) by the One Stop Shop Tax Credit & Duty Drawback Center of the Department of Finance; that presently, Fujitsu, cannot fully utilize its TCC as it is not liable to income tax in view of the ITH incentive, and value-added tax (VAT) because of its zero rated export sales; that its ITH incentive does not cover exemption from DST, such as the DST on original issuance of shares of stock; that in July 1998, your client entered into a loan agreement with Bank of Tokyo-Mitsubishi, Ltd; that the loan agreement was signed by both parties in the Head Office of the Bank in Tokyo, Japan; that the proceeds of the loan was remitted into the Philippines and used by your client as short term working capital; that pursuant to standard practice, your client agreed to pay any DST that may be imposed in the Philippines on the loan transaction; that your client also intends to secure property insurance policies for their various assets; and that again. as a standard procedure, your client will most probably be required by the insurance company to pay the DST due on the policy. In reply, please be informed that this Office is of the opinion as it hereby holds that in both cases, i.e., loan agreement and insurance policies, your client can use the TCC in payment of the DST due. In the case of the loan agreement, the liability for DST falls on your client because while the loan agreement was executed outside the Philippines, Section 180 of the Tax Code of 1997 provides that if the loan proceeds are remitted into and used in the Philippines, the loan agreement will still be subject to DST. The borrower is a party directly and primarily liable for the DST because it is a party who signs the loan agreement. This finds support in Section 173 of the Tax Code of 1997 which provides that the DST is a liability of the person making, signing, issuing, accepting or transferring the taxable document. The lender bank may also be equally liable for DST. However, considering that the lender is a foreign bank and that the loan agreement was signed by it outside the Philippines, it cannot be made liable for DST. Moreover, your client has assumed the liability for DST. It may be noted from Section 173 of the Tax Code of 1997 that the law obligates any of the parties to the transaction to pay the DST. The parties can, therefore, validly enter into agreement as to who will ultimately bear the burden of paying DST due on the document or transaction. The BIR has in the past issued rulings to the effect that then Section 222 of the Tax Code, as amended (now Section 173 of the Tax Code of 1997) places the burden of paying DST upon the parties to the contract and leaves the tax to be paid indifferently by either party and accordingly, the party assuming payment of said taxes becomes directly liable therefor . (BIR Ruling No. 232-82 dated July 19, 1982). Accordingly, by assuming the burden of paying DST on the loan agreement, your client became directly liable therefor. With respect to the DST on property issuance policies, your client is also directly liable therefor. In BIR Ruling No. 036-92 dated January 24, 1992, it was held that "the documentary stamp tax is payable by the person making, signing, issuing, accepting or transferring the document, instrument or paper. This provision leaves the tax to be paid indifferently by either party. Accordingly, in a contract of insurance, either the insurer or the insured is liable for the payment of the documentary stamp tax on the insurance policies issued." On the other hand, Section 204(c) of the Tax Code of 1997 provides that "a Tax Credit Certificate validly issued under the provisions of this Code may be applied against any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable. . ." In view of the foregoing, your client is liable for DST on the loan agreement as well as on the insurance policies. Accordingly, its duly issued TCC may be utilized in payment for the said DST. 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)