Issues Regarding Documentary Stamp Taxes on Financing Documents Relating to Metro Manila Skyway Project

September 24, 1998 BIR RULING NO. 137-98 180, 188-000-00-137-98 Chavez Laureta & Associates LAW OFFICES Penthouse, Heart Tower 108 Valero Street, Salcedo Village Makati City Attention: Atty . Jose C . Laureta Gentlemen: This refers to your letter dated July 21, 1998 requesting on behalf of your client, Citra Metro Manila Tollways Corporation (CMMTC), for a ruling on two (2) issues regarding documentary stamp taxes on the financing documents relating to the Metro Manila Skyway project, the facts of which, as called from your letter, are as follows: The Metro Manila Skyway, which is intended to form the north-south backbone of the Metro Manila Urban Expressway System (MMUES) is an elevated roadway facility consisting of three (3) stages, namely: (a) the South Metro Manila Skyway; (b) the Central Metro Manila Skyway; and (c) the North Metro Manila Skyway; that the construction of the South Metro Manila Skyway which commenced on April 6, 1996 and scheduled for completion in December 1993, has an estimated total cost of approximately US$550 million based on 1994 price; that the said project is being financed as follows: (a) equity contributions (consisting of shareholder's equity and convertible bonds), 46%; and (b) senior debt, 54%; that the amount of the equity portion aggregating $240 million has already been disbursed while the senior debt facility has an aggregate amount of $262 million; that the commitment of the senior lenders to provide the said amount of US$260 million is embodied in an agreement entitled "Master Agreement" with CMMTC, as borrower and group of foreign and local banks, as lenders, with ING Bank N.V. Manila Branch, as Lead Arranger; that the Master Agreement which is typically structured as a standard Euro or Asian Dollar loan agreement, is essentially a commitment by the Lenders to make loans available to CMMTC in the future upon fulfillment of required conditions precedent; that under Section 2.01(q) of the Master Agreement, one of the conditions precedent to the making of '"initial loans" is the issuance by the borrower (i.e., CMMTC) of a "daily executed Note . . . in the principal amount for such Lender's commitment" and not merely in the amount equal to the Initial Loan actually made by each Lender to CMMTC as of the initial drawdown date; that for purposes of clarifying the effect of the condition precedent in said Section 2.01(q) of the Master Agreement, you have presented by way of illustration, viz: "Assuming that the total commitment of the Land Bank of the Philippines under the Master Agreement is US$50,000,000.00, CMMTC would have been required to issue a Note as of the initial drawdown date on May 6, 1998, in the said amount of U$50,000,000.00 even if the initial loan which LandBank disbursed the CMMTC was actually a lesser amount, or more specifically, US$15,267,175.57; thus for purposes of making staggered payment of the documentary stamp tax, CMMTC was allowed by the lenders to issue Notes to each Lender only in the amount equal to the Loan actually disbursed by each of them, as of the initial drawdown date and as of each succeeding drawdowns, i.e., on the US$15,267,175.57 and not on the full amount of US$50,000,000.00, which is LandBank's commitment." and that on the basis of the revision of Section 2.01(q) of the Master Agreement, the documentary stamp tax on the Land Bank Note, as well as on the Notes issued individually by the other Lenders, were calculated on the basis of actual face value of each Note and not on the aggregate amount of the commitment of each Lender . You have further represented that the additional requirement imposed by the Lenders is that the voting rights of at least two thirds of CMMTC's issued and outstanding common or voting shares shall be vested in or given over to a voting trustee chosen by the Lenders; that in compliance therewith, the seven (7) controlling stockholders of CMMTC (consisting of four (4) Indonesian corporations collectively know as CITRA and three (3) Philippine corporations, which include the Philippine National Construction Corporation executed a Voting Trust Agreement in favor of Far East Bank and Trust Company (FEBTC) as voting Trustee for the Lenders; that to consummate the appointment of FEBTC as Trustee, the emolument or voting shares of each of CMMTC were transferred to FEBTC; that as a result of such transfer, the corresponding common or voting share certificates of the seven (7) Trustor corporations were canceled and replaced by a single share certificate issued in favor of FEBTC, as Trustee. On the basis of the foregoing, you are now in effect, requesting for confirmation of your opinion that 1. the documentary stamp taxes payable on each Note issued during each drawdown, e.g., the Land Bank Note of US$15,267,175.27, should be based on the actual face value of each Note and not on the aggregate amount of the Commitment of each Lender under the Master agreement; and 2. assignment or transfer of shares in favor of a trustee, e.g. a trustee designated in the Voting Trust Agreement, is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 but only to the documentary stamp tax of P15.00 on notarial acknowledgment under Section 188 thereof. In reply, please be informed as follows: A. pursuant to then Section 180 of the Tax Code, as amended (also Section 180 of the Tax Code of 1997), there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or a fractional part thereof, of the face value of, among others, a note, provided that only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax. The foregoing provision was implemented by Revenue Regulations 9-94 which reads as follows, viz.: "SEC. 8. Loan Agreements/Promissory Notes secured by a Pledge/Mortgage . Where only one instrument was prepared , made , sign and executed to cover loan agreement/promissory note , pledge/mortgage, the documentary stamp tax prescribed in Section 195 of the Tax Code, as amended, shall be paid and computed on the full amount of the loan or credit granted. In this regard, the instrument shall be treated as covering only one taxable transaction , subject to the higher documentary stamp tax . (Emphasis supplied) According to the facts illustrated above, the issuance of a Note by a borrower came after the signing of the Master Agreement, more specifically on May 6, 1998 which is the initial drawdown date. For each drawdown, a Note equivalent to the amount of the loan so drawn shall be issued. Categorically, the execution of the Master Agreement is a taxable event subject to documentary stamp tax. In the instant case, however, the Master Agreement is not the loan contract itself but an undertaking which envisaged that the lender shall make available for the borrower a certain some of money at a given date which drawdown shall be covered by a loan agreement. Thus, where the subject matter of an agreement is to deliver something or money in this case, it being a real contract, the same is not deemed perfected until after the object of the contract is delivered as provided for in Article 1316 of the Civil Code in relation to Article 1934 of the same Code, which provides that "ART. 1934. An accepted promise to deliver something by way of commodatum or simple loan itself binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the subject of the contract." The drawdown is the delivery of the amount covered by the loan agreement for which a Note is also issued. Considering that the face value of the Note issued is equal to amount of the loan stated in the agreement and actually disbursed, the documentary stamp tax on such loan may be levied either on the loan agreement covering the amount so drawn at a particular dates, i.e., the amount of US$50,000,000.00 or on the Note actually issued as of drawdown date, which is US$15,267,175.57 at the initial drawdown and each Note that may thereafter be issued there being no difference. Accordingly, pursuant to Section 180 of the Tax Code of 1997, this Office hereby holds that since the herein taxpayer categorically states that each Note shall correspond to the amount drawn as scheduled and stated in the contract, then the corresponding documentary stamp tax at the rate prescribed therein, shall be based on the face value of the said Note actually issued which is equivalent to the amount of the loan actually disbursed as of drawdown date. B. Pursuant to Section 59 of the Corporation Code of the Philippines, the voting trust allowed as a condition in a loan agreement for the purpose of conferring upon trustee or trustees the right to vote and other rights pertaining to shares provided that if it shall exceed five (5) at any one time, it shall automatically expire upon full payment of the loan. Since a voting trust is a design which enable the stockholders to dispose of their shares and still retain control of the corporation and although the certificates of stock are transferred in the name of the trustee/s there is really no transfer of ownership over the shares of stock. Such being the case, since the transfer is without consideration, and the beneficial ownership remains with the Trustor, the Voting Trust Agreement executed in connection thereto is not subject to the documentary stamp tax pursuant to Regulations No. 26 otherwise known as the Documentary Stamp Regulations. However, it shall be subject to the documentary stamp tax of Fifteen Pesos (P15.00) imposed under Section 188 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. dctai Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue