Taxability of Loan Agreements Converted to Commercial Paper Transactions

June 17, 1981 BIR RULING NO. 097-81 24-a 085-81 097-81 SM Shoemart 627 Carlos Palanca Street M a n i l a Gentlemen : This refers to your letter dated March 12, 1981 informing this Office that on November 25, 1977, you entered into two (2) loan agreements through Ayala Investments and Development Corporation (AIDC) for a syndicated loan of P50 million payable in five (5) years; that the first loan agreement for P40 million was converted on February 5, 1979 into a commercial paper transaction, whereby, you as borrower, shall issue commercial papers and pay the 35% transaction tax prescribed at the time by Section 210 of the Tax Code; and that the second loan was entered into on November 25, 1977 also negotiated by AIDC for Shoemart with AIDC and AEA Development Corporation as the lenders, whereby, you as borrower shall issue commercial paper and pay the 35% transaction tax. Despite the repeal of said Section 210 of the Tax Code by P.D. No. 1739, you request that you continue paying the 35% transaction tax on long term commercial papers issued prior to the effectivity of P.D. No. 1739. In reply, I have the honor to inform you that your request cannot be granted. Since the law imposing the 35% transaction tax has already been repealed by P.D. No. 1739, you cannot be held liable for the payment of the said tax on commercial papers issued by you. If said commercial papers are deposit substitutes as defined in Section 2(g) of Revenue Regulations No. 12-80, the yield income on said deposit substitutes paid or accrued after the effectivity of P.D. No. 1739 on September 17, 1980, shall be subject to the final withholding tax of 20% [Sec. 3(a)(2), Revenue Regulations No. 12-80]. On the other hand, if the yield income is realized from commercial papers which are not deposit substitutes, such income shall be subject to the regular corporate income tax imposed by Section 24 of the Tax Code. cdt Very truly yours, RUBEN B. ANCHETA Acting Commissioner