BIR Ruling [DA-650-06]

November 2, 2006 BIR RULING [DA-650-06] Secs. 173, 179, 185, 194; RR 26 & RR 9-94; DA 116-98; DA 13-99; DA 666A-99 Samsung Electronics Philippines Manufacturing Corporation Block 6, Calamba Premiere International Park Barangay Batino, Calamba City Laguna Attention: Mr. Jeong Ho Park Chief Financial Officer Gentlemen : This refers to your letter dated September 5, 2006 requesting confirmation of your opinion that the following Agreements entered into by your company, Samsung Electronics Philippines Manufacturing Corporation (SEPHIL) , and its foreign affiliates are not subject to documentary stamp tax (DST): 1. Technical Assistance Agreement; 2. Sales Commission Agreement; 3. Consultancy Agreement; and 4. Guaranty Agreement. the facts, as represented, are as follows: SEPHIL [formerly Philippines Samsung Electronics Corporation (PSEC)] is a corporation duly organized and existing under Philippine laws with office address at the Calamba Premiere International Park-Special Economic Zone. It is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise under Registration Certificate No. 01-011 dated February 9, 2001. The said registration certificate was later amended to change the name of the company from PSEC to SEPHIL. As a PEZA-registered enterprise, SEPHIL was granted a 5-year income tax holiday (ITH) for its original project consisting of the design, manufacture, and sale of electronic products, including optical disk drive products, their components and parts. The ITH incentive will expire on October 31, 2006. Thereafter, SEPHIL will be subject to the 5% final tax on gross income in lieu of the payment of all other local and national taxes. SEPHIL entered into different agreements with some of its foreign affiliates. A brief description of each agreement is provided hereunder: SDITAC TECHNICAL ASSISTANCE AGREEMENT On January 1, 2001 SEPHIL (as licensee) and Samsung Electronics Corporation (SECL, as licensor), a corporation registered and doing business in Korea, executed a Technical Assistance Agreement. SEPHIL, pays royalty fees to SECL, in consideration for the latter's provision of technical information, technical assistance and know-how in the manufacturing of licensed products. SALES COMMISSION AGREEMENT On April 1, 2004, SEPHIL and SECL executed a sales commission agreement whereby SEPHIL will pay SECL sales commissions for the following exporting services, namely: (1) conducting market research and analysis; (2) regularly calling present clients of SEPHIL for the purpose of increasing sale of products; and (3) seeking out new customers for SEPHIL and soliciting orders for products from such customers. CONSULTANCY AGREEMENT SEPHIL entered into a Consultancy Agreement with Samsung Asia Pte. Ltd (SAPL), a company based in Singapore, for the following services: 1. Over-all Business Consulting Services in the following fields: Management Marketing Human Resource Financial Services, Currency Exchange Risk Operation Legal Logistics Tax IT Customer Care 2. Shared Services including: Logistics Protection of PC Information and Network Updating and Maintaining of Network Systems (SAP-R3, SINGLE) Providing new Information Software Sourcing and Coordination with third Party Logistics Service Providers SEPHIL pays management fees for services rendered by SAPL. GUARANTY AGREEMENT SEPHIL has an existing Guaranty Agreement with SECL whereby the latter bound itself to guarantee the loans obtained by SEPHIL from financial institutions (e.g. Standard Chartered Bank). SEPHIL, pays SECL a guarantee fee of 0.15% per annum on the average balance of loans obtained during the year. CaDSHE It is your opinion that the foregoing agreements are not subject to the documentary stamp tax imposed under Title VII of the 1997 National Internal Revenue Code (Tax Code), as amended by RA 9243. In reply, please be informed that documentary stamp tax is an excise tax upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto. It is levied on the exercise by persons of certain privileges conferred by law for the creation, revision or termination of specific legal relationships through the execution of specific instruments. ( Belle Corporation vs. CIR, CTA Case No. 6156, citing Philippine Home Assurance Corp., et al vs. Court of Appeals, 301 SCRA 447 ). Significantly, Title VII of the Tax Code, as amended by RA 9243, enumerates the specific instruments subject to documentary stamp taxes. The rule of statutory construction with regard to enumerations made in a law provides that the express mention of one person, thing, act or consequence is construed to exclude all others. Thus, in order for a document to be subject to DST, it must be a specific instrument mentioned in Title VII of the Tax Code. This position finds support in a number of rulings issued by this Office. In BIR Ruling No. DA 13-99 dated July 29, 1999, it was ruled that assignment of tax credit certificates, not being among those expressly mentioned in Title VII of the Tax Code, is not subject to DST. Similarly, in BIR Ruling DA 116-98 dated July 30, 1998 (the validity of which was affirmed by the CTA in CTA Case No. 6182 entitled " Filinvest Development Corp. vs. CIR "), it was said that inter-office memo covering the advances granted by an affiliate company is not subject to DST since there is nothing in Regulations No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations (Rev. Regs.) No. 9-94 that qualifies the instrument as one subject to documentary stamp tax. Moreover, in BIR Ruling DA 666A-99, as amplified by file Court of Appeals in the case of CIR v. APC Group, Inc., CA-GR. SP. No. 69869, it was held that inter-company advances evidenced by board resolutions and cash vouchers are not subject to documentary stamp tax since board resolutions and cash vouchers do not partake the nature, element and the form of any of the specific instruments mentioned in the law. It is observed that the Agreements between SEPHIL, SECL and SAPL are not among those documents or instruments subject to DST under the Tax Code. Thus, we proceed to discuss the DST on each Agreement as follows: A. TECHNICAL ASSISTANCE AGREEMENT The Technical Assistance Agreement is in itself a licensing agreement which covers both the transfer of technical information and manufacturing know-how of certain products, and provides for support/technical services in order for the licensee to fully understand the technology being transferred. Therefore, such agreement cannot be feasibly entered into without licensing an intangible property (e.g. product logo, design). In short, the performance of technical support services is auxiliary to the licensing of the intangible. A perusal of the provisions of the Tax Code on Documentary Stamp Tax reveals that the law does not impose DST on licensing agreements and similar contracts. Hence, the Technical Assistance Agreement between SEPHIL and SECL is not subject to DST. B. SALES COMMISSION AND CONSULTANCY AGREEMENTS On the other hand, the Sales Commission and Consultancy Agreements executed by SEPHIL, are in the nature of service contracts in which SEPHIL compensates the exporting and consultancy services rendered by SECL and SAPL, respectively. While it is true that the engagement by SEPHIL of the services of its affiliates is a form of a hiring agreement, it is not the kind of hiring contract contemplated under Section 194 of the Tax Code which reads: CEASaT "SEC. 194. Stamp Tax on Leases and Other Hiring Agreements. On each lease, agreement, memorandum or contract for hire, use or rent of any lands or tenements, or portions thereof, there shall be collected a documentary stamp of Three Pesos (P3.00) for the first Two Thousand Pesos (P2,000), or fractional part thereof, and an additional One peso (P1.00) for every One Thousand Pesos (P1,000) or fractional part thereof, in excess of the first Two Thousand Pesos (P2,000) for each year of the term of said contract or agreement." Under the well-known principle of ejusdem generis , it is quite apparent that what is contemplated in Section 194 is a contract for hire, use or rent of lands or tenements, and not for hire of personal services. Consequently, the Sales Commission and Consultancy Agreements of SEPHIL with SECL and SAPL are not subject to DST. C. GUARANTY AGREEMENT With respect to the Guaranty Agreement, it is worthy to mention that in Section 173 of the Tax Code, what are being taxed are documents, instruments, loan agreements and papers (emphasis supplied). A loan agreement within the contemplation of Section 173, in relation to Section 179 (then Section 180) of the Tax Code and Section 3 of Rev. Regs. 9-94, is defined as "a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid." The object of a loan is the money or the consumable thing, the ownership of which is transmitted to the debtor upon delivery of the same by the creditor. In contrast, a guaranty is "a contract by virtue of which a person called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. ( Art. 2047, Civil Code ) The object of a guaranty is not the money or consumable thing per se that is transferred to the debtor bill the price paid by the debtor for the guaranty of his loan. Inasmuch as the nature and elements of a guaranty differ from a loan agreement, the former cannot be treated as a taxable document within the purview of Section 179. Neither call a guaranty be considered as a debt instrument also subject to DST under Section 179. In BIR Ruling 020-05 dated October 3, 2005 interpreting Section 179 (then Section 180) of the Tax Code, as amended by RA 9243, it was ruled that in order for a debt instrument to be subject to the documentary stamp tax, it must represent a "borrowing and lending" transaction. There is no borrowing or lending transaction in a guaranty; hence, it is a not a debt instrument subject to DST. A guaranty likewise differs from a fidelity bond or an insurance policy subject to DST under Section 185 of the Tax Code, as amended by RA 9243. This provision contemplates bonds and suretyships for which premiums are charged. While a guaranty and suretyship both guarantee the fulfillment of an obligation, the nature of a surety's undertaking is very much distinguished from that of a guarantor. It must be stressed that under Section 185, what is being subject to DST is the obligation guaranteeing "mercantile credits." A surety guarantees mercantile credits because in a suretyship, what is being insured is the debt incurred by the principal debtor. On the other hand, what is being insured in a guaranty is the solvency of the debtor, and not the mercantile credit itself. Therefore, the Guaranty Agreement between SEPHIL and SECL, not being the obligation mentioned in Section 185 of the Tax Code, is not subject to DST. Settled is the rule that in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer. This is because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. { CIR v. Fireman's Fund Insurance Company, 148 SCRA 315 (1987); Collector of Internal Revenue v. La Tondena, Inc., 5 SCRA 665 (1962); Manila Railroad Co v. Collector of Customs, 52 Phil 950 (1929) }. This strict construction finds application in the instant case. There is no basis for imposing a tax on the subject Agreements in the absence of a clear and express provision in the Tax Code subjecting the same to documentary stamp taxes. cCDAHE IN VIEW OF THE FOREGOING, this Office holds that the Technical Assistance, Sales Commission, Consultancy and Guaranty Agreements executed by SEPHIL and its foreign affiliates are not subject to documentary stamp taxes imposed under Title VII of the 1997 Tax Code, as amended by RA 9243. However, the notarial acknowledgement to the Agreements is subject to the documentary stamp tax of P15.00 only pursuant to Section 188 of the Tax Code. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service