San Miguel Corporation

December 19, 2007 BIR RULING [DA-672-07] Sec. 180; Sec. 36, RR 2 DA-484-04; DA-353-97; DA-666-99 San Miguel Corporation 40 San Miguel Avenue Mandaluyong City Attention: Mr. Alfredo R. Villacorte Tax Manager Gentlemen : This refers to your letter dated February 20, 2007 requesting for confirmation of your opinion that the interest payments received by San Miguel Corporation (SMC) from its subsidiaries/affiliates ("SMC-Affiliates") for payment to banks and other financing institutions on loans obtained by SMC on their behalf do not form part of SMC's income subject to income tax and consequently to withholding tax and that the taxes withheld and remitted to the Bureau of Internal Revenue (BIR) by SMC, for and on behalf of its affiliates and subsidiaries, on interest payments made to the banks constitute substantial compliance with the withholding tax requirements. HDATSI As represented, SMC is a corporation duly organized and existing under the laws of the Philippines. It is engaged in the food, beverage and packaging businesses. SMC and its subsidiaries/affiliates are also known as the San Miguel Group of Companies (SMG). When necessity arises and the SMC-Affiliates are unable to secure funds from banks and other financing institutions (hereinafter collectively referred to as "financing institutions") due to the absence of credit facility, SMC utilizes its own credit facility to obtain funds on behalf of the SMC-Affiliates. Thereafter, SMC extends the same as advances to SMC-Affiliates to address the latter's various operational and capital expenditures, which include, among others, the acquisition of furniture, fixture and equipment, project development costs, working capital, pre-operating expenses, and the acquisition of shares of stock. DCcTHa As such, SMC passes to SMC-Affiliates the burden to pay the interest due on loans obtained without additional charge. The SMC-Affiliate delivers to SMC the corresponding interest on bank loans and other bank charges, thus, the payments received by SMC are the same as what is due to the financing institutions. Considering that the loan was obtained for the benefit of the SMC-Affiliates and the bank charges related thereto are paid for by SMC-Affiliates, they are deemed the actual party-in-interest and hence, constituted as the proper withholding tax agents. However, since the SMC-Affiliates are entities distinct and separate from each other, and since SMC is the counterparty that the financing institution recognizes insofar as the loans are concerned, the documentation and recording of the payments to the financing institutions can be complex and confusing. Thus, for expediency, considering that SMC collects the payments from various affiliates for delivery to the financing institution, SMC withholds and remits the tax on payments made by SMC-Affiliates to the BIR using its own Tax Identification Number (TIN) and issues the corresponding withholding tax certificates to the bank. In effect, SMC is delegated as agent by SMC-Affiliates to withhold the appropriate tax on the payments made. As such, the payments are not claimed by SMC as an expense in its books instead the same are claimed as legitimate business expense by the SMC-Affiliates subject to the provisions of Section 34 (B) of the Tax Code of 1997, as amended. In reply, please be informed as follows: 1. Interest payments received by SMC from SMC-Affiliates for payment to banks and other financing institutions on loans obtained by SMC on their behalf do not form part of SMC's income subject to income tax and consequently to withholding tax. CcSTHI It is a principle of taxation that income, in the broad sense, means all wealth, which flows into the taxpayer other than mere return of capital (Section 36, Revenue Regulations No. 2). Income for tax purposes is the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profits from investment ( Fisher vs. Trinidad, 43 Phil. 973). The interest payments received by SMC from SMC-Affiliates is not a flow of wealth from SMC-Affiliates to SMC inasmuch as these are payables held in trust by SMC for eventual remittance to the financing institutions without any mark-up or additional charges. There being no income payment, there is, therefore, no income to speak of that will result in the imposition of income tax or creditable withholding tax. 2. Taxes withheld and remitted to the BIR by SMC, for and on behalf of its affiliates and subsidiaries, on interest payments made to the banks constitute substantial compliance with the withholding tax requirements. This Office had occasion to rule in BIR Ruling No. DA-484-04 dated September 10, 2004 citing BIR Ruling DA-353-97 dated October 30, 1997 as follows: ". . . Considering that Telicphil had control over the payment to suppliers or contractors for Telicphil and NDTN costs, the withholding of taxes by Telicphil, in lieu of the NDTN co-owners, on income payments made to suppliers or contractors of NDTN costs and the remittance thereof to the BIR using the tax identification number of Telicphil is deemed substantial compliance with the withholding tax requirements insofar as the correct amount of taxes were withheld and remitted to the government. Hence, said remittance may be credited to the account of the NDTN co-owners, as the actual payors." Applying the above ruling, your opinion that SMC, as party having control over the money for payment to the financial institutions, can validly be designated as agent of SMC-Affiliates to withhold, remit the tax and issue the corresponding certificates which acts of SMC as agent are deemed substantial compliance with the withholding tax requirements. Such being the case, SMC-Affiliates may properly claim payment of bank charges ( e.g. interest) as legitimate business expense in their books. cIaHDA 3. The transaction between SMC and SMC-Affiliates is not subject to documentary tamp tax. In a similar case, The Management and Board of Directors of Aboitiz Group of Companies which are engaged in various lines of business have agreed that when necessity arises, the companies which are financially capable will fund the subsidiary, affiliate and sister company which may be in need of financial assistance or backing. In certain instances and due to force of circumstances, they borrowed from the bank what they advanced. Some of these advances are interest-bearing (passed-on interest). The pertinent board resolutions and the cash vouchers issued by the lender and acknowledged receipt by the borrower are the basis in recording the transactions in the books of both lender and borrower. In the lender's book, the entry is a debit to Advances To Subsidiaries/Affiliates and a credit to Cash. In the borrower's book, the entry is a debit to Cash and a credit to Advances Due From Subsidiaries/Affiliates. No loan agreements, promissory notes and debit or credit memos nor inter-company loan memos are issued in these transactions by the lender or borrower. This Office ruled ". . . since the inter-company advances are not, covered by loan agreements, promissory notes, debit and credit memos nor by inter-company loan memos and since the only documents relating to the inter-company advances are the board resolutions of the lenders and the cash vouchers issued by the lenders which are acknowledged by the borrowers, the said inter-company advances are not subject to documentary stamp tax. Such board resolutions of the lenders and the cash vouchers acknowledged by the borrowers are not in the nature of promissory not subject to documentary stamp tax under Section 180 of the Tax Code of 1997." (BIR Ruling No. DA-666-99-A dated December 3, 1999) In the instance case, DST shall likewise not be imposed on the transaction between SMC and SMC-Affiliates since the same is not a loan agreement. 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 as null and void. CDESIA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service