BIR Ruling [DA-585-98]

December 29, 1998 BIR RULING [DA-585-98] Bangko Sentral ng Pilipinas Roxas Boulevard Pasay City Attention: Mr . Edgardo P . Zialcita Deputy Governor Gentlemen : This refers to your letter dated October 21, 1998 requesting a ruling as to whether or not Foreign Exchange Contracts (FECs) executed between the Bangko Sentral ng Pilipinas (BSP) and the commercial banks as well as their renewals are subject to documentary stamp tax. cdta It is represented that sometime in 1988-1992, the then Foreign Exchange Operations and Investments Department of the Central Bank had FEC or "swap" transactions with Commercial Banks; that in a letter dated November 12, 1998, Citibank, N.A., relative to the aforementioned query of the BSP pointed out that the swaps with the BSP were primarily lodged in the commercial banks' FCDU books since these were largely funded by FCDU deposits and/or borrowings; and that said transactions were classified as offshore transactions in the FCDU books of the commercial banks, considering that the BSP was the counterparty. In reply thereto, please be informed that the FECs executed by the BSP with local commercial banks are actually the so-called "SWAP Transactions" whereby the local bank issued on order or cable/instruction to its foreign correspondent bank to remit a specific sum in dollars/foreign currency to the Federal Reserve Bank which in turn advises the BSP that a specific sum in dollars/foreign currency is available to the local bank. The said order or cable is considered a telegraphic transfer subject to the documentary stamp tax under then Section 182 of the Tax Code of 1977 (now also Section 182 of the Tax Code of 1997) as amplified by Sections 50 and 51 of Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations, reading: "SEC. 182. Stamp tax on Foreign Bills of Exchange and Letters of Credit . On all foreign bills of exchange and letters of credit (including orders, by telegraph or otherwise, for the payment of money issued by express or steamship companies or by any person or persons) drawn in but payable out of the Philippines in a set of three or more according to the custom of merchants and bankers, there shall be collected a documentary stamp tax of thirty centavos (P0.30) on each Two hundred pesos, or fractional part thereof of the face value of any such bill of exchange or letter of credit, or the Philippine equivalent of such face value, if expressed in foreign currency." (Emphasis supplied) "SEC. 50. Basis of tax in case of telegraphic transfers or orders for the payment of money drawn in but payable out of the Philippine Islands (now Philippines) should be the face value of such telegraphic transfers or orders computed, if expressed in a foreign currency with the rate of exchange taken into consideration." (Emphasis supplied) "SEC. 51. What may be regarded as telegraphic transfer . If a local bank cables to a certain bank in a foreign country with which bank said local bank has a credit, and directs that foreign bank to pay another bank or person in the same locality a certain sum of money, the document for and in respect of such transaction will be regarded as a telegraphic transfer, taxable under the provisions of Section 1449(i) of the Administrative Code." It is clear from the aforequoted Section 182 of the Tax Code of 1997 that foreign bills of exchange and letters of credit (including orders by telegraph or otherwise) for the payment of money drawn in but payable out of the Philippines are subject to documentary stamp tax. Accordingly, the documentary stamp tax prescribed by Section 182 of the Tax Code of 1997 is due and payable on the order covering the forward transaction as well as the order covering or leading to the spot sale of foreign exchange and not the document embodying the "Offer to Sell Spot Exchange under SWAP Arrangement" or the sale or purchase of foreign exchange which is not subject to the documentary stamp tax. The real parties to the transaction are the local bank as drawer which has a SWAP arrangement with the BSP and the former's foreign correspondent bank as drawee/acceptor. Under Section 173 of the Tax Code of 1997, whenever one party to the taxable document enjoys exemption from the documentary stamp tax, the other party thereto who is not exempt shall be the one directly liable for the tax; hence, since the drawee (the local bank's foreign correspondent bank) is outside the taxing jurisdiction of the Philippines, the drawer local bank is liable to pay the documentary stamp tax on the aforementioned orders. In view thereof, the local commercial bank is liable to the payment of the documentary stamp tax on Foreign Exchange Contract or SWAP Transactions executed between the BSP and the local commercial bank as well as on the renewal thereof which is considered as another swap transaction. cdtech Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue