BIR Ruling [DA-699-99]

December 21, 1999 BIR RULING [DA-699-99] 180, 188 377-92, S-34-413-96 DA-699-99 Philippine Deposit Insurance Corporation 2228 Pasong Tamo Street Makati City Attention: Ms . Aurora C . Baldoz Vice President - CRL II Gentlemen : This refers to your letter dated November 25, 1999 requesting for a ruling regarding documentary stamp tax implications on the financial assistance that will be implemented by the Philippine Deposit Insurance Corporation (PDIC) together with Bangko Sentral ng Pilipinas (BSP) in favor of Allied Banking Corporation (ABC), to address the problems brought about by the closure of Orient Commercial Banking Corporation (OCBC). It is represented that on February 14, 1998, OCBC unilaterally declared a bank holiday; that on October 14, 1998, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP-MB) ordered the closure of OCBC; on May 07, 1999, the MB-BSP placed OCBC under liquidation and appointed PDIC as liquidator thereof; that in order to mitigate the adverse consequences of OCBC's closure and the erosion of public confidence in the banking industry, PDIC and BSP decided to call a canvass among interested banks that were willing to assume liability over uninsured deposits [in excess of P100,000.00] that will be individually assigned by OCBC depositors; that BSP agreed to extend financial assistance, by way of a loan to PDIC, to the banking institution that will require the lease amount needed to assume the assigned deposit liabilities; that on July 22, 1999, the PDIC Board of Directors approved the grant of authority for PDIC to act as a conduit for the financial assistance that will be extended by BSP to the banking institution that will assume the assigned deposit liabilities; that on July 30, 1999, the BSP-MB approved the grant of a loan to PDIC that will enable PDIC to purchase the assigned deposit liabilities from the acquiring or assuming banking institution; that on August 17, 1999 a canvass was held wherein ABC emerged as the banking institution requiring the least amount needed to assume the assigned deposit liabilities; that on August 19, 1999 the PDIC Board of Directors approved the grant of financial assistance to ABC by way of purchase of the assigned deposit liabilities; and that basically the financial assistance implementation calls for the execution of the following documents: 1. Deed of Assignment (Attachment A) OCBC depositors assign their uninsured deposits to ABC; 2. Loan and Fund Management Agreement (Attachment "B") between BSP and PDIC. BSP extends a maximum P4,678,000.000.00 loan at 4% interest per annum to PDIC which will be utilized as follows: a. P2,840,766,000.00 to be invested in Treasury Bills, the principal and interest of which are reserved for payment of the P4,678,000,000.00 and interest; and b. P1,837,234,000.00 to fund the purchase from ABC a maximum amount of P2,339,828,249.89 assigned deposit liabilities for a consideration of 78.52% of the face value of the assigned deposit liabilities; 3. Memorandum of Agreement (Attachment "C") between PDIC and ABC, PDIC uses the P1,837,234,000.00 loan from BSP to purchase, by way of financial assistance, the assigned deposit liabilities from ABC; Based on the foregoing, you wish to be advised which of the above documents is subject to documentary stamp tax and at what rate, if any. LibLex In reply thereto, please be informed that Section 180 of the Tax Code of 1997, thus states, viz: "SEC. 180. Stamp Tax on All Bonds, Loan Agreements, Promissory Notes, Bills of Exchange, Drafts, Instruments and Securities Issued by the Government or Any of its Instrumentalities, Deposit Substitute Debt Instruments, Certificates of Deposits Bearing Interest and Others Not Payable on Sight or Demand . On all bonds, loan agreements, including those signed abroad, wherein the object of the contract is located or used in the Philippines, bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities. deposit substitute debt instruments, certificates of deposits drawing interest, orders for the payment of any sum of money otherwise than at sight or on demand, on all promissory notes, whether negotiable, except bank notes issued for circulation, and on each renewal of any such note there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two Hundred Pesos (P200.00), or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: Provided , That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: . . ." A documentary stamp tax is levied on the document and not on the property which it described (Collector of Internal Revenue vs. Held Lumber, 10 SCRA 372). Although, it is not intended to be a tax on the document alone the law taxes the document because of the transaction. (BIR Ruling No. 389-93 dated October 4, 1993) A careful scrutiny of the documents presented and annexed to this query would reveal that the steps undertaken are not independent from one another but constitutes one transaction, which is the grant of a loan by BSP to ABC to cover the uninsured portion of the deposits of the various depositors of OCBC. The extension of the loan is aimed at mitigating the adverse effects of OCBC's closure as well as the erosion of public confidence in the banking industry. This single transaction is broken down into different segments as follows: a. The Loan and Fund Management Agreement between BSP and PDIC wherein BSP extends a maximum P4,678,000,000.00 loan at 4% interest per annum to PDIC. This agreement was made feasible under Resolution No. 1062 of the Monetary Board of the BSP, approving the grant of a loan to PDIC to enable PDIC to purchase the assigned deposit claims from ABC, with the balance to be invested to earn and enable full payment of the obligation upon maturity in 20 years. This financial assistance to the OCBC depositors, through the PDIC, will entitle BSP to liquidating dividend, which is otherwise due to the uninsured depositors of OCBC upon its dissolution. b. The Memorandum of Agreement, between PDIC and ABC, wherein PDIC uses a portion of the BSP loan proceeds, referred to in the Loan and Fund Management Agreement, in order to purchase from ABC, the deposit liabilities assigned thereto by the OCBC depositors for a consideration of 78.52% of the face value of the assigned claims. Additionally, ABC is awarded the OCBC branch licenses by the BSP, and further, shall be accorded by PDIC, as liquidator of OCBC, the option to top by five percent (5%) any winning bid in the auction of OCBC branch premises. PDIC's mandate therein is in accordance with its authority under Sec. 12(c) of Republic Act 3591. LibLex c. The Deeds of Assignment executed by the OCBC depositors assigning their uninsured deposits to ABC completes the scenario and serves as the basis for the depositors' claim which ABC undertakes to pay initially 20% in cash and the balance over a period of five-years subject to interest of two percent (2%) per annum. It is clear from the foregoing that the basic facility used to consummate the transaction, is the contract of loan. While the documentary stamp tax is viewed as a tax on the document, it is in reality a form of excise tax. It is an excise tax upon the facilities used in the transaction of the business separate and apart from the business itself (Du Pont v. U.S., 300 US 150). Accordingly, the execution of both the Loan and Fund Management Agreement (BSP-PDIC), and the Memorandum of Agreement (PDIC-ABC) shall be subject to the documentary stamps tax under Section 180 of the Tax Code of 1997 imposed on the loan agreements, at the rate of Thirty centavos (P0.30) on each Two hundred pesos (P200) or fractional part thereof, of the face value of such agreement, that is, P4,678,000,000.00. Likewise, the Deeds of Assignment executed by the OCBC depositors in favor of ABC shall, upon notarization, be subject to stamps tax of P15.00 per document pursuant to Section 188 of the Tax Code of 1997. 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, and/or any of the attachments to this letter are not executed accordingly, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue