Exemption of PAL from Documentary Stamp Tax on Promissory Notes Issued by PITC

April 9, 1986 BIR RULING NO. 043-86 193 000-00 043-86 Gentlemen : This refers to your letter dated July 16, 1985 requesting confirmation of your opinion that under P.D. No. 1590 (Philippine Airlines' new franchise) you are exempt from documentary stamp tax on the promissory notes issued and delivered by Philippine International Trading Corporation (PITC) pursuant to a Credit and Guaranty Agreement to avail of credit facilities and to accommodate Philippine Airlines (PAL) as the beneficiary of the proceeds of the said promissory notes. cdtech It is represented that at the request of PAL, PITC and the Republic of the Philippines entered into a Credit and Guaranty Agreement dated as of April 14, 1984 with Crocker National Bank (Bank) and Pacific Overseas Finance Corporation (POFC) upon the terms and conditions of which the Bank and POFC have agreed to extend short term financing of up to US $25,000,000.00 for the purchase of certain products and to confirm payment of and extend medium term financing of up to US $15,000,000.00 for, certain capital equipment and other products for PAL; that PAL agreed, among other things, to assume all payment obligations of PITC under the said Credit and Guaranty Agreement; that the Commitment Period expires on April 14, 1985 under the Credit and Guaranty Agreement, which expiry date was later on extended to July 31, 1985 in accordance with the Agreement as amended (hereinafter referred to as Amendment Agreement); and that under the Amendment Agreement, PAL confirms its absolute and unconditional assumption of all payment obligations of PITC under the Credit and Guaranty Agreement, including without limitation the payment of documentary stamp taxes due on the notes . In reply, please be informed that pursuant to Section 229 (now Sec. 193) of the Tax Code as amended by P.D. No. 1959 effective October 15, 1984, a documentary stamp tax is imposed on promissory notes issued, whether negotiable or non-negotiable. As an excise tax, it is levied upon the exercise of the privilege of issuing the promissory notes. Accordingly, the documentary stamp tax on the promissory notes should have been a direct liability imposable on PITC, the issuer of the notes in this case were it not for the fact that under the aforesaid Credit and Guaranty Agreement, PAL assumed payment of said tax thus becoming directly liable therefor. However, under Section 13 of PAL's new franchise (P.D. No. 1590) which was accepted on November 28, 1984, reading: "Sec. 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax: "(a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code; or "(b) A franchise tax of 2% of the gross revenues derived by the grantee from all sources, without distinction as to transport or non-transport operations; provided, that with respect to international air-transport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this tax. The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now and in the future, including but not limited to the following: xxx xxx xxx "(4) All taxes on interest, fees, and other charges on foreign loans obtained and other obligations incurred by the grantee where the payment of such taxes is assumed by the grantee; (Emphasis supplied)" PAL, the franchise grantee and the End-user is exempt from documentary stamp tax on the promissory notes issued by PITC, payment of which it has assumed under the aforesaid Credit and Guaranty Agreement, as amended. The said tax exemptions are not withdrawn by P.D. No. 1931 because pursuant to Letter of Instructions No. 1427 promulgated on September 18, 1984, P.D. No. 1931, withdrawing tax exemptions heretofore granted in favor of government owned or controlled corporations, including their subsidiaries, is not applicable to PAL. This ruling applies only to the facts as herein presented, and the same shall not apply to cases where it appears that the reason for the assumption of taxes is to extend to a favored party the preferential tax treatment accorded to PAL. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner