BIR Ruling [DA-744-06]

December 29, 2006 BIR RULING [DA-744-06] Sec. 179; BIR Ruling No. 020-05 SM Investments Corporation SM Corporate Offices Building A, Bay Boulevard SM Central Business Park Bay City, Pasay City Attention: Ms. Cecilia R. Patricio VP, Corporate Tax Division Gentlemen : This refers to your letter dated November 14, 2006 requesting for confirmation of your opinion that the promissory notes executed by SM Investments Corporation ("SMIC") to evidence the unpaid balance of the purchase price of Equitable PCI Bank, Inc. ("EPCIB") shares purchased as a result of tender offer of SMIC in consortium with its affiliates, are not subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended by Republic Act (RA) No. 9243. It is represented that SMIC is a corporation organized and existing under Philippine laws with principal place of business at SM Corporate Offices, Building A, Bay Boulevard, SM Central Business Park, Bay City, Pasay City; that SMIC is a holding company listed at the Philippine Stock Exchange ("PSE"); that its subsidiaries are involved primarily in shopping mall development, retail merchandising, financial services, and real estate development and tourism; that for purposes of consolidating its holdings in EPCIB and to put in new capital to ensure that EPCIB meets its capital requirements, SMIC and its affiliates made a tender offer to the existing shareholders of EPCIB for the latter's shares; that as a result of the tender offer, bank shareholders agreed to sell 51.60% of the bank's total outstanding shares; that the Terms of the Tender Offer for the Common Shares of Equitable PCI Bank Inc. ("Tender Offer") provides that "Ten percent of the consideration will be paid on the settlement date of the tender offer or on October 2, 2006 and for the remaining ninety percent (90%), the balance shall be payable in installment; that as stated in the EPCIB Tender Offer, SMIC shall execute a promissory note (PN) in favor of, either (i) each selling broker for its tendering clients; or (ii) the tendering shareholders that have delivered certificated shares or scripless shares directly to the transaction broker; that the Securities and Exchange Commission ("SEC") has approved a plan of SMIC to issue promissory notes to shareholders of EPCIB; that SEC exempted the promissory notes from registration, noting the company's ability to pay debts and the "limited character" of its promissory note issue; and that upon payment of ten percent (10%) of the consideration, the shares were transferred to SMIC. DcTaEH In reply thereto, please be informed that Section 179 of the Tax Code of 1997, as amended by R.A. No. 9243, provides, viz.: "SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: Provided, That for such debt instrument with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five (365) days: Provided, further That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of contract is located or used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." ( Emphasis supplied ) A careful scrutiny of the above-cited provisions disclosed that the documentary stamp tax is imposed on "debt instruments" representing "borrowing and lending transactions". This covers all types of debt instruments as enumerated therein which specifically include "promissory notes" as among the debt instruments subject to the documentary stamp tax. Thus, the debt instrument to be taxed must be one that represents a borrowing and lending transaction. So again Revenue Regulations No. 13-2004, implementing R.A. No. 9243, confirms that Section 179, which used to be Section 180 of the Tax Code, now covers all debt instruments representing borrowing and lending transactions. R.A. No. 9243 was enacted to "rationalize the provisions on documentary stamp tax" of the Tax Code, and has consolidated the old Section 174 (bonds and indebtedness) and Section 176 (due bills and certificates of indebtedness) to cover all debt instruments. It is clear from R.A. No. 9243 that for any debt instrument to be subject to the documentary stamp tax it must represent a "borrowing and lending" transaction. SAHEIc At this juncture observation has to be made of the fact that the PN executed by SMIC to evidence the unpaid balance of the purchase price of the EPCIB Shares sold in its favor by EPCIB shareholders, is not subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended, by R.A. No. 9243 because it does not represent a "borrowing and lending" transaction. It only represents or evidences the unpaid price of the EPCIB shares purchased by SMIC ( BIR Ruling No. 020-05 dated October 3, 2005 ) SUCH BEING THE CASE, this Office hereby confirms your opinion that the PN executed by SMIC to evidence unpaid balance of the purchase price of the EPCIB shares, as a requirement of the EPCIB Tender Offer, is not subject to the documentary stamp tax imposed under Section 179, supra. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service