BIR Ruling [DA-570-04]

November 10, 2004 BIR RULING [DA-570-04] 173; RA 7916; DA-107-2001 SGV and Co . Ayala Avenue, Makati City Metro Manila Attention: Mr. Joel L. Tan-Torres Tax Partner Gentlemen : This refers to your letter dated September 15, 2004 requesting on behalf of your client, Analog Devices General Trias, Inc. (ADGT) , for a confirmatory ruling that the loan transactions between your client and its affiliate non-resident foreign corporations will not subject your client nor said affiliates to the documentary stamp tax (DST) as provided under Section 179 (formerly Section 180) of the Tax Code. It is represented that ADGT is a PEZA-registered company as provided under R.A. No. 7916, as amended, and is currently entitled to incentive of the 5% preferential tax rate on gross income earned "in lieu of all national and local taxes"; that ADGT is contemplating to enter into certain loan transactions with its foreign affiliate corporations, Analog Devices International Financial Services Ltd. (ADIFS) and Analog Devices Holdings B.V. (ADBV), both of which are non-resident foreign corporations not doing business in the Philippines; as follows: 1. Renewal of the inter-company loan from ADIFS; and 2. Conversion of accounts payable due to ADBV, which arose from ADGT's purchase of certain fixed assets from ADBV, into an inter-company loan. In reply, please be informed that Section 24 of Republic Act (RA) No. 7916, otherwise known as the Special Economic Zone Act of 1995, as amended, provides, to wit: "SEC. 24. Exemption from National and Local Taxes . Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ecozone. In lieu thereof, five per cent (5%) of the gross income earned by all enterprises within the ecozone shall be paid and remitted . . . " This exemption from the payment of national internal revenue taxes is reiterated in Section 1(A), Rule XIV of the Rules and Regulations to Implement RA 7916 and implemented through BIR Revenue Regulations (RR) No. 12-97. Considering that ADGT, a PEZA-registered enterprise, is liable to the preferential tax rate of 5% on its gross income earned, in lieu of all local and national taxes (except real property tax on land), it is exempt from the payment of all other national taxes including documentary stamp taxes (RR No. 12-97; BIR Ruling No. 146-99 dated September 14, 1999). This includes documentary stamp taxes on loan agreements. (BIR Ruling No. DA-107-2001 dated January 1, 2001) DHTECc Under Section 173 of the Tax Code of 1997, whenever one party to the taxable document enjoys exemption from documentary stamp taxes, the other party who is not exempt shall be the one directly liable for the tax. Ordinarily, ADGT's contracting party is liable to pay the documentary stamp tax on these documents. However, no documentary stamp tax may be imposed where such other contracting party is likewise exempt from liability for documentary stamp taxes. (BIR Ruling No. 198-99 dated December 10, 1999) On the other hand, ADIFS and ADBV which are the other parties to the loan transactions of ADGT, being foreign corporations which are non-resident and not doing business in the Philippines, and therefore beyond Philippine taxing jurisdiction are not likewise subject to the documentary stamp tax because such non-resident entities are not subject to Philippine taxation (BIR Ruling No. 007-2000 dated January 5, 2000). This follows from the inherent limitation of taxation it can only be exercised within the territorial jurisdiction of the taxing authority Accordingly, ADGT, being entitled to the 5% preferential tax on gross income earned, as a PEZA registered enterprise, is not subject to the DST imposed under Section 179 of the Tax Code as amended, on its loan transactions with ADIFS and ADBV. Furthermore, Section 173 of the Tax Code cannot be applied on the latter creditor corporations as these are non-resident foreign corporations beyond the taxing jurisdiction of the Philippines. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group