DOJ Opinion No. 020, s. 1997

DOJ OPINION NO. 020 , s. 1997 April 4, 1997 Governor Gabriel C. Singson Bangko Sentral ng Pilipinas Manila Sir : This refers to your request for opinion relative to the proposed bonds of long-term maturities to be issued by the Bangko Sentral ng Pilipinas (BSP) in the United States this April, 1997 in the amount of at least US $750,000,000 with Salomon Brothers as lead underwriter, the proceeds of which are intended for general funding purposes of the Bank. LLpr Specifically, you ask (1) whether or not the above described bonds shall be exempt from the payment of documentary stamp taxes; and (2) whether or not the interest income of holders of such bonds shall be subject to income taxation. It is your position that the exemption of the proposed bond issues from the documentary stamp tax and the interest income of the holders of such bonds from the income tax may be justified under the broad and comprehensive provision of Section 125 of the BSP Charter which provides: "Section 125. Tax Exemptions . The Bangko Sentral shall be exempt for a period of five (5) years from the approval of this Act from all national, provincial, municipal and city taxes, fees, charges and assessments. The exemptions authorized in the preceding paragraph of this section shall apply to all property of the Bangko Sentral , to the resources, receipts, expenditures, profits and income of the Bangko Sentral , as well as to all contracts, deeds, documents and transactions related to the conduct of the business of the Bangko Sentral : Provided , however , That said exemptions shall apply only to such taxes, fees, charges and assessments for which the Bangko Sentral itself would otherwise be liable, and shall not apply to taxes, fees, charges, or assessments payable by persons or other entities doing business with the Bangko Sentral : Provided , further , That foreign loans and other obligations of the Bangko Sentral shall be exempt, both as to principal and interest, from any and all taxes if the payment of such taxes has been assumed by the Bangko Sentral ." Pursuant to the aforequoted provision, the BSP enjoys a five-year exemption from all taxes, charges, fees and assessments imposed by the national or local governments in respect of its resources, receipts, expenditures, profits and income, as well as its contracts, deeds, documents and transactions related to the conduct of the business of the Bank and for which payments the BSP shall otherwise be liable itself (see first proviso). The BSP shall be exempt, both as to principal and interest, from any and all taxes imposable on its foreign loans and other obligations if payment of such taxes has been assumed by the BSP (see last proviso). BSP's position is that the bonds are exempt from the documentary stamp taxes because its tax exemption privilege applies as well "to all contracts, deeds, documents and transactions related to the conduct of the business of the Bangko Sentral" and the proposed bonds come within the purview of the terms "contract, deeds, documents and transactions". On the other hand, BSP posits that the interest income of the prospective bondholders is likewise exempt from income taxation because under existing practice, the BSP assumes the tax obligations of the lenders with respect to their income from foreign borrowings of the Philippine Government, and under the last proviso of Section 125, the BSP is exempt from taxes assumed by it in connection with its foreign borrowings. We believe that the subject bonds to be issued by the BSP in the United States and the interest income of the prospective holders of such bonds are exempt from the documentary stamp taxes and the income tax imposed under the National Internal Revenue Code (NIRC). With respect to the documentary stamp tax, Section 173 of the NIRC provides: "SEC. 173. Stamp taxes upon documents, instruments, loan agreements and papers . Upon documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales and transfers of the obligation, right, or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided , that whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. (as amended by RA 7660)" Under Section 173, a documentary stamp tax shall be levied, collected and paid for every document, instrument, loan agreement and paper executed evidencing acceptance, assignment, sale and transfer of an obligation, right or property, by the person making, signing, issuing, accepting or transferring the obligation, right or property. If one party to the transaction is tax-exempt, the burden of paying the documentary stamp tax shall be shifted to the other party who is not exempt (see proviso) In the case of the BSP, since it is exempt from national and local taxes under Section 125 of its charter aforequoted, it is deemed exempt from paying the documentary stamp taxes collectible on its bond issues under Section 173 of the NIRC, also abovequoted. However, by virtue of the proviso in said Section 173, the obligation of paying the documentary stamp taxes shall fall on the prospective bondholders who are not exempt. Nonetheless, if BSP assumes payment of such taxes, the BSP bonds would also be exempt from the documentary stamp taxes pursuant to the last proviso of Section 125 of the BSP Charter. It bears stress that the last proviso of Section 125 of the BSP Charter is a special provision which specifically applies to "foreign loans and other obligations" of the BSP. As such, it qualifies the general tenor of the proviso of Section 173 of the NIRC which passes the liability for the payment of the documentary stamp taxes to the "other party . . . [to the transaction] who is not exempt". The BSP bonds in question are deemed "other obligations" of the BSP within the meaning of the last proviso of Section 125 for which BSP may be exempt from paying documentary stamp taxes if payment of such taxes is assumed by BSP. We reach the same conclusion with respect to the interest income of the prospective holders of the BSP bonds, subject of your second query. As you state, it is standard stipulation in the foreign borrowings of the Philippine Government and its instrumentalities that the borrower assumes the tax obligations under Philippine law of the lenders with respect to their income derived from such borrowings. In the case of the BSP bonds, we understand that BSP (the borrower) will assume, consistent with standard practice, the payment of income tax on the income (i.e. interest income) to be derived by the bondholders (the lenders) from such borrowings. This being so, the interest income of the prospective bondholders comes squarely within the tax exemption privilege of the BSP under the last proviso of Section 125 of the BSP Charter, which exempts the BSP from "any and all taxes" it has assumed in connection with its "foreign loans and other obligations". Hence, such interest income shall be exempt from income taxation since BSP, as borrower, will assume the payment of the income tax thereon. Please be guided accordingly. Very truly yours, (SGD.) TEOFISTO T. GUINGONA, JR. Secretary