BIR Ruling

October 8, 1977 Bancom Development Corporation Bancom Bldg., Pasay Road Makati, Rizal Attention: Mr . Ramon del Rosario, Jr . Gentlemen : This refers to your letters dated July 5 and July 26, 1977, requesting confirmation of your opinion that the issuance of primary bonds by the Paper Industries Corporation of the Philippines (PICOP), the public offering of which will be underwritten by a syndicate of underwriters (of which you have been designated as Managing Underwriter) on a firm commitment basis, is not subject to the 35% transaction tax imposed by Presidential Decree No. 1154, as implemented by Revenue Regulations No. 7-77. It is represented that PICOP will be offering to the public primary bonds in the aggregate principal sum of one hundred million pesos (P100,000,000.00); that the bonds will be issued as debentures in denominations of one thousand pesos (P1,000.00) or multiples, to mature in ten (10) years at 14% interest per annum payable semi-annually; that the bonds are convertible into common stock of the issuer at the option of the bond holder at an agreed conversion price; that the issue will be covered by a "Trust Indenture" with a duly authorized trust corporation as required by the Securities and Exchange Commission, which trustee will act for and in behalf of the debenture bond holders as beneficiaries; that once issued, the bond cannot be preterminated by the holder and cannot be redeemed by the issuer until after eight (8) years from date of issue; that the debenture bonds will be subordinated to present and future debts of PICOP; and that said bonds are intended to be listed in the stock exchanges, which will place then alongside listed equity issues. In reply, I have the honor to inform you that although the bonds hereinabove described are commercial papers which will be issued in the primary market, however, it is clear from the abovestated facts that said bonds will not be issued as money market instruments. Such being the case, and considering that the purposes of Presidential Decree No. 1154, as can be gleaned from Letter of Instruction No. 340, dated November 24, 1975, are (a) to regulate money market transactions and (b) to ensure the collection of the tax on interest derived from money market transactions by imposing a withholding tax thereon, said bonds do not come within the purview of the "commercial papers" intended to be subjected to the 35% transaction tax prescribed in Presidential Decree No. 1154, as implemented by Revenue Regulations No. 7-77. (See Section 2 of said Regulation) Accordingly, PICOP is not subject to 35% transaction tax on its issues of the aforesaid bonds. However, those investing in said bonds should be made aware of the fact that the transaction tax is not being imposed on the issuer of said bonds by printing or stamping thereon, in bold letters, the following statement "ISSUER NOT SUBJECT TO TRANSACTION TAX UNDER P.D. 1154. BONDHOLDER SHOULD DECLARE INTEREST EARNING FOR INCOME TAX." In our words, bondholders/purchasers of said bonds are subject to income tax on interests and/or gains derived from their investment or transaction in said bonds, and that PICOP and the underwriters shall comply with the requirements of Revenue Regulations No. 8-76 dated November 26, 1976 by reporting in BIR Form No. 1701B the name, address and tax account number of the recipient of such interests and/or gains. In order that PICOP and the underwriters can comply with the requirements of Section 77, as amended by Revenue Regulations No. 8-76, they should provide themselves with registry books wherein shall be entered the name, address and tax account number of the person or entity to whom each bond is issued, endorsed or assigned, and the amount of interest or gain paid to each investor or bondholder. Very truly yours, EFREN I. PLANA Acting Commissioner