Promissory Notes to Evidence Unpaid Balance of NPAs' Purchase Price Not Subject to Documentary Stamp Tax

October 3, 2005 BIR RULING NO. 020-05 Sec. 179 R.A. 9243 000-00 Schuylkill Asset Strategists (SPV-AMC), Inc . Unit 119, LRI Business Plaza 210 Nicanor Garcia Street, Makati City Attention: Mr. Cesar M. Mayo & Ms. Nora O. Vinluan Gentlemen : This refers to the letter of your legal counsel, Corporate Counsels, Philippines, dated August 22, 2005 requesting confirmation that the promissory notes (PN) executed by Schuylkill Asset Strategists (SPV-AMC), Inc. (Schuylkill for brevity) to evidence unpaid balance of the purchase price of the non-performing assets ("NPAs") sold in its favor by qualified financial institutions ("FIs"), per requirement by the Bangko Sentral ng Pilipinas (BSP) as a condition for the issuance of the Certificate of Eligibility (COE) under Republic Act (RA) No. 9182, otherwise known as the "Special Purpose Vehicle (SPV) Act", are not subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended. In reply, please be informed that your opinion that the PN executed by Schuylkill to evidence unpaid balance of the purchase price of the NPAs sold in its favor by FIs, per requirement by the BSP, are not subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended, is hereby confirmed. Section 179, as amended by Republic Act (RA) 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) It is clear from the above provision that the documentary stamp tax imposed is on "debt instruments" representing "borrowing and lending transactions". This covers all types of debt instruments as enumerated therein which specifically includes "promissory notes" as among the debt instruments subject to the documentary stamp tax. However, the debt instrument to be taxed must be one that represents a borrowing and lending transaction. Revenue Regulations No. 13-2004 dated December 23, 2004, implementing RA 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. RA 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. What is clear from RA No. 9243 is that for any debt instrument to be subject to the documentary stamp tax it must represent a "borrowing and lending" transaction. In the case of the PN issued by Schuylkill, it is not within the scope of Section 179 because it does not represent a "borrowing and lending" transaction. It only represents or evidences the unpaid purchase price of the NPAs purchased by Schuylkill. Likewise, the execution of the PN is a requirement made by the BSP as a condition for the issuance of the COE. 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. ESIcaC Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue