BIR Ruling [DA-022-00]

January 11, 2000 BIR RULING [DA-022-00] Urban Bank Urban Bank Plaza Urban Avenue Makati City Attention: Mdms . Nida S . Santos and Corazon M . Bejasa Senior Vice Presidents Gentlemen : This refers to your letter dated August 25, 1999 requesting for confirmation of your opinion that in connection with the issuance of an asset-backed bond for which Urban Bank has been designated as Trustee: 1. The gains, which would include interest or yield and any other income derived from the sale, exchange or retirement of the bonds, that is realized from the bond issue, with maturity of more than five (5) years, is excluded from Gross Income and therefore exempt from the Income Tax. 2. The bonds are also not "Deposit Substitute" instruments and therefore not subject to the 20% final withholding tax. 3. The bonds are subject to Documentary Stamp Tax (DST) under Section 180 of the National Internal Revenue Code (NIRC), as amended. It is represented that said asset-backed bond shall be issued with the following features: 1. The Bonds will have a final maturity of more than five (5) years. 2. This bond issue will be backed by assets consisting of home mortgage loans and Contract to Sell originated by financial institutions or developers and guaranteed by the Home Insurance and Guaranty-Corporation (collectively, the Program Loans), through a securitization structure. Under the securitization structure, the bondholder owns a direct and undivided ownership interest in the Program Loans that serve as the underlying assets for the Bonds. 3. The bondholders will receive principal, interest and other income actually collected from cashflows received by the Trustee from the Program Loans, not of expenses incurred by the Trust. Payments will be remitted monthly or quarterly. 4. The Program Loans will be guaranteed by the Home Insurance and Guaranty Corporation and therefore will carry the full faith and credit of the Republic of the Philippines. In reply, please be advised that the terms "Bonds, Debentures and Certificate of Indebtedness" are associated with and only to include instruments having the general character of investment securities as distinguished from instruments evidencing debts arising from ordinary transactions between individuals. In particular, the term "Bond" means an obligation in writing and under seal binding the obligor to pay a sum of money to the obligee . . ." (9 J.C. 7, cited in Annotations and Jurisprudence on the NIRC of 1977 by JOSE ARANAS, 1979 ed., p. 384). It is known in the financial market worldwide as a paper, generally in the form of a certificate that described and contained the details of a loan or borrowing transaction rather than by any specific assets to distinguish them from asset-backed bonds or mortgaged bonds. Over all, " bonds, debentures, notes, or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupon or in registered form " are embraced under the general definition of the term "Securities" (Sec. 22 (T), NIRC of 1997). On the other hand, the term "Deposit Substitutes" is particularly defined under Section 22(Y) of the Tax Code of 1997, thus "The term "deposit substitute" 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 on 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 purchase agreements centered 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." Under Section 32 (B)(7)(g) of the National Internal Revenue Code, as amended by R.A. No. 8424, otherwise known as the Tax Reform Act of 1997, " Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years" are excluded from gross income, hence, exempt from income tax effective January 1, 1998. Since the maturity period of the above-mentioned asset-backed bond issue will be more than five (5) years, the gains which would include interest or yield and any other income derived from the sale (including origination, issuance, or flotation), exchange or retirement of the bonds that may be derived therefrom shall accordingly be exempt from income tax. Likewise, not being in the nature of 'Deposit Substitute Instruments' as this term is defined in the Code and as further described in Rev. Regs. 17-84, the gains accruing from these long-term asset-backed bonds are also exempt from the 20% final withholding tax. (BIR Ruling No. 166-99 dated October 25, 1999). cdlex For the purpose of the Documentary Stamp Tax, Section 180 of the NIRC of 1997, classifies Bonds separately and distinctively from Deposit Substitute Debts Instruments, but nevertheless both classes of documents are made subject to documentary stamp tax "at the rate of Thirty Centavos (P0 . 30) on each Two Hundred Pesos (P200) or fractional part thereof, of the face value" of such instrument. There is therefore no question that the asset-based bonds contemplated in your letter are subject to the rate of documentary stamp tax under Section 180 of the Code. In light of the foregoing considerations, this Office hereby confirms tour aforementioned opinion. This ruling is being issued on the basis of the foregoing representation. If upon investigation it will be discovered that the facts are different, then this ruling shall be deemed and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group