Stamp duty and debt: Key considerations

Part of doing business is managing cash flow. As organizations expand operations or address funding gaps, financing through loans from banks, financial institutions or third parties may help supplement liquidity requirements and address cash flow deficits.

While businesses are generally aware of the final tax on interest payments, stamp duty is sometimes overlooked when assessing the overall tax costs associated with debt or loan arrangements.

Under Section 179 of the Tax Code, a documentary stamp tax (DST) or stamp duty of 75 percent of one percent is imposed on the original issuance of a debt instrument based on the issue price. A debt instrument refers to an obligation or right arising from Philippine sources or property situated in the Philippines.  For debt instruments with a term of less than one year, the proportional amount shall be collected, taking the number of days of term in ratio to 365 days.

Section 179 also provides that, to secure the debt, only one stamp duty will be imposed on the loan agreement and promissory notes. This list was later expanded under Republic Act 12214 to include mortgage, security interest over personal property and other contracts. The tax authorities later clarified in Revenue Regulations (RR) 19-2025 that when the said documents are simultaneously issued and executed, only one stamp duty will be imposed on the document, depending on whichever will yield a higher tax.

In cases where only one instrument or document was prepared to cover a loan agreement/promissory note/pledge/mortgage, Section 6 of RR 19-2025 also clarified that the instrument shall be considered as covering only one taxable transaction. However, the applicable provision of the Tax Code would be Section 195 on mortgages, pledges and deeds of trust which imposes a progressive rate of DST based on the amount lent. This is 40 pesos on the first P5,000, and 20 pesos on each successive P5,000 or fractional amount.

In a recent Court of Tax Appeals decision, the court reminded that DST is an excise tax as it is imposed on the transaction rather than on the document, and it is the presence of the transaction, rather than the instrument, which determines whether DST is applicable. This, however, is qualified. In the same CTA En Banc decision, the CTA also reminded that Section 179 requires that the object of the contract is located or used in the Philippines. In this case, the Philippine domestic company was the lender to its non-resident foreign affiliates. As the object of the loan contract was not released, located and/or used in the Philippines, the CTA En Banc confirmed that the situs of the transaction was outside the Philippines and, therefore, not subject to DST.

The CTA also explained that Section 173 of the Tax Code, which allows shifting of DST liability in case one of the parties to the transaction is exempt therefrom, cannot be used as a basis to impute DST liability, as the provision presupposes that the transaction itself is subject to DST.  According to the CTA, Section 173 of the Tax Code does not operate to create liability for DST when there is none to begin with.

In summary, businesses must not overlook the implications of DST when obtaining debt or loans, as proper assessment and compliance contribute to effective cash flow management and regulatory compliance. Understanding the application of DST based on the nature and situs of transactions can also help organizations make informed financial decision-making.

Laurice Claire Penamante-Rasco is a manager from the Tax Group of R.G. Manabat & Co. (KPMG in the Philippines), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Laurice Claire Penamante-Rasco or Mary Karen Quizon-Sakkam through [email protected], social media or visit www.home.kpmg/ph.