BIR Ruling [DA-565-98]

December 16, 1998 BIR RULING [DA-565-98] MERALCO Ortigas Avenue, Pasig City 0300 Metro Manila Attention: Mr . German F . Martinez, Jr . Senior Manager and Head Tax and Tariff Gentlemen : This refers to your letter dated January 14, 1998 requesting for a ruling regarding your documentary stamp tax liability on your importation of goods from abroad. cdt It is represented that Manila Electric Company (Meralco) is engaged in the transmission and distribution of electric power in Manila and suburbs; that in the course of such activity, Meralco procures goods from abroad; that such importation is covered by Letters of Credit (LC), Bills of Exchange and Trust Receipt Agreement; that such importation is covered by the following procedures, viz: "a) Meralco requests bank to open a Letter of Credit in favor of the supplier or exporter. The LC issued by the bank authorizes the supplier/exporter to draw draft or drafts which will be honored by the bank if drawn in accordance with the terms and conditions in LC. Upon opening of the LC, Meralco will pay for the corresponding DST due. "b) After shipment, the exporter will present the required documents to the negotiating bank for payment based on the draft presented or Import Bill. Based on this negotiation, DST is again charged by the bank. "c) If payment is not made within 30 days, Meralco will execute a Trust Receipt Agreement with the bank (where Meralco has TR line) and another DST is also due." In reply, please be informed that pursuant to Section 173 of the Tax Code of 1997 a documentary stamp tax, while it is being levied on the document, is an excise tax because it is really imposed on the privilege to enter into a transaction. Thus, while there are various or series of documentation to be followed there seems to be only one transaction involved. Initially, an importer, Meralco in this case, has to open an LC with a bank in favor of its supplier. The opening of LC is, in reality, an application for a loan by Meralco from the bank to assure the supplier that the goods to be delivered shall be paid. Likewise, the issuance of the said LC is tantamount to approval of the loan or opening a credit line for which a DST shall be imposed thereon pursuant to Section 182 of the same Tax Code. It should be noted, however, that the LC is not the loan itself but merely an instrument assigning the proceeds to the suppliers as payment for the goods delivered by them. The loan contract between Meralco and the bank is a real contract effected by the delivery of the loan (see Art. 1934, New Civil Code). The said loan contract is deemed perfected between Meralco and the bank upon completion of the loading of the goods and payment to the supplier. When the loading is completed, the beneficiary-supplier-exporter presents to the negotiating/paying bank for payment based on the draft or import bill corresponding to the actual goods shipped under the Letter of Credit, for which the documentary stamp tax is again due and levied on the same LC pursuant to Sec. 180 of the Tax Code of 1998. The basis of the levy of another DST on the LC is the consequence of the negotiation made, completely distinct from the first levy made on the same LC as a credit facility or as an evidence of the loan. Simultaneous to the opening of the LC as a credit facility, the Letter of Credit Trust Receipt line (LC-TR line) with the bank is deemed open. The TR line serves as a security in the event the loan is not paid within 30 days from completion of the delivery or negotiation of the LC. The availment of the LC-TR line is contingent to the nonpayment of the loan, and for which availment a DST is again imposed. In this connection, Section 7 of Revenue Regulations No. 9-94 (Documentary Stamp Tax Regulations) provides that where a loan agreement and a promissory note are simultaneously issued and executed, the loan having been secured, only one DST shall be imposed on either document, whichever will yield a higher tax. On the bases of the foregoing facts and clear provisions of the Tax Code, only one documentary stamp tax should be levied on the said importation involving several procedures, viz; opening of a credit line by Meralco and approval by the bank, as evidenced by a Letter of Credit; negotiation for payment of the same LC by the beneficiary; and finally, in case payment is not made within 30 days, the availment of the Trust line which is actually covered and incorporated in the LC-TR by the Entrustee through the execution of a Trust Receipt. (BIR Ruling No. 84-97 dated July 29, 1997) Accordingly, for each availment of the credit line, i.e., for every single importation, the corresponding documentary stamp tax, regardless of the procedures involved, is levied only once at the rate prescribed in Sec. 180 of the Tax Code of 1998. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)