CO Ferrer & Ang-Co Law Offices

December 28, 2007 BIR RULING [DA-701-07] DA 650-06 CO Ferrer & Ang-Co Law Offices 11V Atlanta Centre, 31 Annapolis Street Greenhills, San Juan Metro Manila Attention: Atty. Anna Liza M. Ang-Co and Atty. Maria Angeli L. Ferrer Gentlemen : This refers to your letter dated August 2, 2007 stating that your clients, Pikeville, Inc. (Pikeville) and Dasma Forbes, Inc. (Dasma) [Affiliates], are affiliates and sister companies, being wholly owned by the same stockholder and belong to the same group of companies, which are all duly organized and existing under Philippine laws; that due to the tight cash flow of Pikeville, the sole stockholder of Pikeville granted interest-free advances to Pikeville in the amount of P62,000,000.00 in 2006 and P1,355,605.24 in prior years; that these advances were used by Pikeville solely to meet the working capital, operational and capital expenditures, and other financial needs of Pikeville; that on the other hand, Pikeville has also granted interest-free advances to its affiliate Dasma in 2006 due to the urgent need of Dasma to meet its financial obligations in the purchase of its capital asset; and that these inter-corporate interest-free advances, hereinafter collectively referred to as Inter-Corporate Advances, are not covered by loan agreements, promissory notes, or debit and credit memos but are evidenced by board resolution and/or check or journal vouchers acknowledging the advances. SDcITH Based on the foregoing representations, you now request confirmation of your opinion that interest-free inter-corporate advances made to Pikeville and Dasma by its shareholders or affiliates (1) are not covered by Revenue Memorandum Order (RMO) No. 63-99 and consequently not subject to imputed interest under said RMO and not subject to income tax or withholding tax; and (2) are not subject to documentary stamp tax as there is no taxable debt instrument issued to evidence or document the loan obligation. In reply thereto, please be informed that this Office had already occasioned to rule on the matter when it said in BIR Ruling No. 191-99A dated December 3, 1999 that ". . . the foregoing inter-corporate advances are not covered by RMO No. 63-99 dated July 19, 1999. Section 2.3 of the RMO states that it does not apply to indebtedness which was in fact a contribution to capital. The foregoing inter-corporate advances are analogous to capital contribution since it is based on percentage of stockholdings of the stockholders making the advances. The fact that some individual stockholders in some instances are not able to contribute to the fund constituting the advances does not destroy its character as an analogous capital contribution. In other instances where the advances are made to meet the financial need of borrowing company and the financial ability of the lending company, it is clear that these are emergency loans to help a related company which is short of capital. These are not the instances covered by Section 4.1 of the RMO which would authorize the Commissioner of Internal Revenue to allocate interest income under Section 50 of the Tax Code of 1997 because such inter-corporate loans are clearly not transactions done for tax avoidance or evasion purposes." Similarly situated is BIR Ruling No. DA536-04 dated October 29, 2004, where it was held that EHSADa "Accordingly, the advances made by SCAD-Singapore to SCAD-Phils are in the nature of capital contributions and therefore not covered by RMO No. 63-99 and consequently not subject to the imputed interest under the aforesaid RMO. As such, any income received by SCAD-Singapore from the said advances to SCAD-Phils are not subject to income tax and consequently to withholding tax." This Office justified its rulings with the following ratiocination that the interest-free Inter-Corporate Advances by and to Pikeville and/or Dasma are in fact capital contribution to finance the working capital, operational and capital expenditures of its subsidiaries or affiliates and therefore not covered by RMO No. 63-99 and not subject to imputed interest income under said RMO. As such, no income tax or withholding tax are due on these interest-free advances. Finally, BIR Ruling No. DA666A-99 dated December 3, 1999, this Office ruled that ". . . 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 voucher acknowledged by the borrowers are not in the nature of promissory note subject to documentary stamp tax under Section 180 of the Tax Code of 1997. This was also reiterated in BIR Ruling No. DA696-06 dated December 11, 2006, where it was held that ". . ., no documentary stamp tax is due under Section 179 of the Tax Code of 1997, as amended by Republic Act No. 9243, as implemented by Revenue Regulations No. 13-2004, as no debt instrument was issued to evidence or document the advances extended by SDC to V&L other than the check issued by SDC which was accompanied by check payment voucher of the company." ISTDAH The above-mentioned rulings are fortified in Commissioner of Internal Revenue vs. Filinvest Development Corporation and Filinvest Alabang, Inc. (CA-G.R. No. SP No. 74510, January 26, 2005), where it was held that "Section 3(b) of Revenue Regulations No. 9-94 defines a loan agreement as follows: 'It is 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 term shall include credit facilities, which may be evidenced by credit memo, advice or drawings.' It can be discerned from the foregoing definition that nothing in the nature of the so called 'instructional letters or vouchers' could we find any direct semblance with the concept of a loan agreement. As clearly worded, a loan agreement is a contract in writing whereby one party delivers to the other party money or other consumable thing subject to repayment. The instructional letters and vouchers that respondent subjected to DST do not contain the necessary elements of a loan agreement. It does not embody an express stipulation between the parties, where one is obligated to deliver and the other to repay. Neither is it a contract in writing. It is merely an internal document, unilaterally prepared by petitioner for the purpose of recording the advances it made to its affiliates to avoid the co-mingling of funds of the corporate affiliates (BIR Ruling No. 116-98 dated July 30, 1998) EHITaS As . . . held in the case of APC Group, Inc. vs. CIR, CTA Case No. 6155, March 11, 2002: There is nothing in Section 180 that provides that board resolution, inter-office memoranda, letters of instructions, journal or cash vouchers evidencing lending/borrowings are subject to Documentary Stamp Tax. Clearly, what Section 180 taxes are loan agreements, promissory notes, bill of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities or certificates of deposits drawings interest and others not payable on sight or demand. It should likewise be stressed that in Section 173 of the Tax Code, documentary stamp tax is essentially a tax upon documents, instruments, loan agreements and papers. The instructional letter and cash/journal vouchers containing petitioner's advances to its affiliates, are not loan agreement within the contemplation of Section 173 in relation to Section 3(b) and Section 6 of Revenue Regulations No. 9-94. At this point, it is worthy to note that even the BIR issued a ruling, which clearly states that inter-company advances covered only by board resolutions and cash vouchers are not subject to DST under Section 180 of the Tax Code. Such being the case, the imposition of DST on instructional letters or vouchers should necessarily fail." Later, in BIR Ruling No. DA650-06 dated November 2, 2006, this Office ruled 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 R.A. No. 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." IcTEAD WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that 1. Interest-free inter-corporate advances made to Pikeville and Dasma by its shareholders or affiliates are not covered by RMO 63-99 and consequently not subject to imputed interest under said RMO and not subject to income tax or withholding tax; and 2. Likewise it is not subject to documentary stamp tax as there is no taxable debt instrument issued to evidence or document the loan obligation. 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. EIcTAD Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service