Professional Documents
Culture Documents
BIR Ruling (DA - (FIT-002) 054-10) - FWT, GRT and DST On Treasury Bonds and On Secondary Trading
BIR Ruling (DA - (FIT-002) 054-10) - FWT, GRT and DST On Treasury Bonds and On Secondary Trading
Gentlemen :
This refers to your letter dated March 8, 2010 requesting confirmation of the
tax treatment of the proposed issuance by the Republic of the Philippines (Republic)
of the 3-year and 5-year Fixed Rate Multi-Currency Retail Treasury Bonds for
Overseas Filipino Workers (OFWs) (hereafter referred to as "rTB for OFWs" or
"rTBs" for brevity). cHDAIS
It is further represented that the rTBs will be offered only in the Philippines on
primary issue to qualified retail investors, domestic and resident foreign corporations
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 1
and foreign currency depositary units (FCDUs). To provide investment opportunities
to OFWs and other qualified retail investors, a certain portion of the issue will be
allocated for them. The qualified retail investors here refer to OFWs, migrant
Filipinos, their families and beneficiaries, trusts holding funds for and in their behalf
and such other individual investors as the Secretary of Finance may determine.
"3-year and 5-year Fixed Rate Multicurrency Retail Treasury Bonds for
Overseas Filipino Workers in US Dollar and Euro Denominations due 2013
and 2015 Principal Commercial Terms
Selling Agents: Dealers who made a successful bid for both US Dollar
and Euro Tranches, with an aggregate minimum principal amount equivalent to
US$5,000,000.00 of the US Dollar Tranche or €1,000,000.00 of the 3-year and
5-year Fixed Rate Multicurrency Retail Treasury Bonds for Overseas Filipino
Workers (the "Bonds") TIaCcD
The Issuer reserves the right to increase the overall size of the Issue.
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 2
US$ Tranche Euro Tranche
US$5,000,000.00 €1,000,000.00
US$1,000,000.00 €1,000,000.00
ISIN/Series Code:
€ 3-year: EURB0313D018
€ 5-year: EURB0515D018
Maturity Date: 29 April 2013 and 29 April 2015 for the 3-year and
5-year Bonds, or if the Issue Date does not occur on 29 April 2010, the Maturity
Date shall be the date that is 3 and 5 years, respectively, following the Issue
Date.
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 3
Issue Price: At par (or 100%)
Interest Rate: The final interest rate for each Tranche shall be determined
through Dutch Auction to be participated in by Government Securities Eligible
Dealers ("GSEDs")
(iv) Corporates;
GOCCs and LGUs may only purchase the Bonds directly from the Issuer
through over-the-counter facility of BTr.
Retail Investors: The term "Retail Investor" shall refer to: (i) Target
Retail Investors, (ii) Non-OFW Individuals, and (iii) trusts. CDHSac
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 5
Retail Sales Obligations: Each Selling Agent shall be required to sell to
Retail Investors (as defined above), at least 20% in aggregate US Dollar value of
its subscription in both US Dollar and Euro Tranches of the Bonds (as allocated
to it by the Issuer) at any time within a period commencing on the Issue Date up
to and including the date that is Thirty (30) Business Days from the Issue.
Taxation: The interest income earned by the investors on the Bonds shall
be subject to the prevailing withholding tax, except as otherwise prescribed for
Target Retail Investors.
Documentary stamp tax (DST) on original issue of the Bonds shall also
be for the account of the Issuer.
The Issuer shall assume and pay for the final withholding tax on the
interest income earned from the Bonds by Target Investors, provided the
following eligibility requirements among others are complied with to the
satisfaction of the Issuer at the time of subscription to or purchase of the Bonds:
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 6
ii. He submits his Philippine passport showing that
he is a resident of another country or his Bureau of
Immigration ID showing he reacquired Filipino citizenship;
(c) For the legitimate spouse, children, parents of OFW and Migrant
Filipino and Allottees of OFWs —
The Issuer shall be deemed to have been granted the authority to verify
the truthfulness and accuracy of the information and documents supplied by a
Target Investor. If at any time it turns out that the Target Investor did not satisfy
the requirements set forth herein, the Target Investor shall not be entitled to
avail of the tax incentive.
Sinking Fund: The Issuer shall set up and maintain a sinking fund with
the BTr in order to accumulate the amounts necessary to pay the principal of the
Bonds on the Maturity Date.
Eligibility: The Bonds shall qualify in the same manner as all other
treasury notes and bonds in respect of (i) insurance reserves under the rules and
regulations of the Insurance Commission, (ii) performance and judicial bonds,
and (iii) permitted foreign currency cover for FCDU liabilities DEICaA
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 7
Settlement Procedures: Settlement shall follow the procedure prescribed
in the Settlement Procedures for the Multicurrency RTB Public Offering shown
as Annex D hereof.
1. That the quarterly interest income to be derived from the rTB shall
be subject to Final Withholding Tax ("FWT") at the following
rates:
We reply as follows:
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 8
"The term "deposit substitutes" *(3) (Y) The term 'deposit substitutes'
shall mean an alternative form of obtaining funds from the public (the term
'public' means borrowing from twenty (20) or more individual or corporate
lenders at any one time), other than deposits, through the issuance, endorsement,
or acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing of receivables and other obligations, or
financing their own needs or the needs of their agent or dealer. These
instruments may include, but need not be limited to, bankers' acceptances,
promissory notes, repurchase agreements, including reverse repurchase
agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP)
and any authorized agent bank, certificates of assignment or participation and
similar instruments with recourse: Provided, however, That debt instruments
issued for inter-bank call loans with maturity of not more than five (5) days to
cover deficiency in reserves against deposit liabilities, including those between
or among banks and quasi-banks, shall not be considered as deposit substitute
debt instruments."
Notwithstanding the above definition, this Office has already ruled that the
mere issuance of government debt instruments and securities falls within the coverage
of "deposit substitutes" irrespective of the number of lenders at the time of
origination. 3(4) Thus, considering that the rTB for OFWs shall be issued by the
Republic, the rTB is classified as a deposit substitute and therefore, interest income
derived therefrom shall be subject to the following taxes:
a. 20% FWT imposed under Section 24 (B) (1) of the Tax Code, if
the buyer (or bondholder) is an individual citizen, e.g., OFWs, their
families and beneficiaries;
b. 20% FWT imposed under Sections 27 (D) (1) and 28 (A) (7) (a), of
the same Tax Code, for domestic and resident foreign corporations,
respectively; and
c. 10% FWT imposed under Sections 27 (D) (3) and 28 (A) (7) (b) of
the Tax Code if the buyer is an FCDU.
It bears notice that the final tax on that interest income shall be withheld at
source at the time the coupon payments are made, i.e., on a quarterly basis.
Furthermore, any gain that may be derived on the secondary trading of rTBs
shall be subject to income tax pursuant to the provisions of Sections 24 (A), 25 (A)
(1), 27 (A) and 28 (A) of the same Tax Code if the holder-investor is an individual
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 9
citizen, non-resident alien, domestic corporation, and resident foreign corporation,
respectively. In case the holder of said Bond is a non-resident individual whose
country/state has tax treaty with the Philippines, the applicable tax treaty provision
shall apply.
Section 121 of the Tax Code of 1997, as amended by R.A. No. 9337, provides
that —
It is clear from the above provisions that the gross receipts are classified into
four (4) categories, i.e., (a) interest, commissions and discounts from lending activities
and income from financial leasing; (b) dividends and equity shares; (c) royalties,
rentals and all other items treated as gross income; and (d) net trading gains, with each
category having its own applicable tax rate.
Applying the foregoing, the interest earned by FCDUs from the rTBs shall be
subject to gross receipts tax of 5% since the interest is derived from a lending activity,
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 10
i.e., the purchase of a bond issued by the Republic. On the other hand, net trading
gains derived on secondary trading of rTBs are subject to gross receipts tax of 7%.
For purposes of this section, the term debt instrument shall mean
instruments representing borrowing and lending transactions including but not
limited to debentures, certificates of indebtedness, due bills, bonds, loan
agreements, including those signed abroad wherein the object of contract is
located or used in the Philippines, instruments and securities issued by the
government or any of its instrumentalities, deposit substitute debt instruments,
certificates or other evidences of deposits that are either drawing interest
significantly higher than the regular savings deposit, taking into consideration
the size of the deposit and the risks involved or drawing interest and having a
specific maturity date, orders for payment of any sum of money otherwise than
at sight or on demand, promissory notes, whether negotiable or non-negotiable,
except bank notes issued for circulation."
Thus, rTBs to be issued by the Republic are subject to DST pursuant to the
aforequoted provision. The payment of the DST shall be made within five (5) days
from the close of the month when the taxable document was made, signed, issued,
accepted or transferred. 4(5) However, the transfer of rTBs in the secondary market by
way of simple delivery to the buyer is not subject to DST, unless the transfer carries
with it a renewal and issuance of new treasury notes in the name of the transferee to
replace the old ones. Hence, for this reason the secondary trading of rTBs in the name
of the transferee will no longer be subject to DST.
4. Assumption of Tax
"The government's guaranty to pay the interest free of any tax entitles the
holder or investor of the instrument to receive the agreed interest without any
deduction for the tax required to be withheld by the government on deposit
substitute. It does not mean, however, that the interest income in itself is exempt
from tax. As there is no law or regulation providing for the tax exemption of
interest income derived from any government bond or instrument, be it issued in
peso or in foreign currency, the tax required to be withheld and remitted to the
government is still due and payable to the BIR but to be borne by the
government.
The proposed tax assumption in the instant case does not purport to make the
rTB for OFWs a tax-exempt instrument but simply shifts the burden of the tax from
the qualified retail investors (e.g., OFWs) to the Republic. This Office is not aware of
any law prohibiting a party from entering into an agreement to assume the burden of
the tax that may be assessed against the other contracting party, provided that the
agency assuming said tax is acting within the authority and mandate by law granted to
it, and that such authority includes the assumption of taxes due on particular
transactions.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then
this ruling shall be considered null and void.
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 13
Endnotes
1 (Popup - Popup)
1. Pursuant to Republic Act 245, as amended, the Secretary of Finance is authorized to
borrow to meet public expenditures authorized by law and to prescribe the financial
terms of any debt instruments, including bonds to be issued for the purpose.
2 (Popup - Popup)
2. See Principal Commercial Terms on Taxation, in relation to Item 8 (d) of the Program
Mechanics of the Issuance of the Multicurrency Retail Treasury bonds.
3 (Popup - Popup)
* Note from the Publisher: Copied verbatim in the official copy.
4 (Popup - Popup)
3. BIR Ruling DA-022-06A dated February 1, 2006 citing BIR Ruling No. 007-04 dated
July 16, 2004.
5 (Popup - Popup)
4. Section 5, Revenue Regulations No. 6-2001 dated July 31, 2001.
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 14