BIR Ruling [DA-062-98]

February 24, 1998 BIR RULING [DA-062-98] MEMORANDUM FOR : The Commissioner This is a progress report on the request of the Philippine Stock Exchange (PSE) for ruling concerning the tax implications of its proposed product, Securities Lending and Borrowing (SBL). aisadc At the outset, we wish to state herein that SBL exists in developed countries like US, Canada, UK, Japan and Australia and in some countries in Southeast Asia, i.e., Hongkong, Malaysia and Singapore. The Philippines, as admitted by PSE, has yet to come up with rules to govern the borrowing and lending of securities. The basic concept of SBL, as explained by PSE in its letter dated December 1, 1997 is as follows: ". . . , SBL basically, involves three parties, the Lender, the Borrower and the Agent. A lender, who owns certain securities (i.e., shares of stock listed in the stock exchange) lends the same to a Borrower, either directly or through an Agent. For the lender to be able to lend securities to the Borrower, the shares of stock are physically and legally transferred to the Borrower. The Borrower could borrow securities for his own account, in which case, there is physical transfer of the same to the Borrower. The Borrower could also borrow securities for sale to a third party, in which case, the Lender will legally and physically transfer the securities directly to the Borrower's buyer. "In turn, the Borrower puts up a collateral of 100% (or such higher percentage as may be agreed upon by the parties) of the market value of the securities borrowed. The collateral may be in the form of cash, government securities, irrevocable letters of credit or equities. Since the securities loaned are listed in the stock exchange and traded frequently, their market value necessarily fluctuates. Thus, the Borrower may be required to give additional collateral to cover increases in the market value of securities. Conversely, the Borrower may request the return of the excess collateral from the Agent or from the Lender himself, if there is no Agent, if the market value of the shares will decrease. 5. Whether or not the rebate to be received by the Borrower will be subject to income tax. On the other hand, on the part of the lender, whether the rebate as well as the commissions paid to the Agent may be deducted as business expense. During the roundtable discussion on Securities Borrowings and Lending (SBL) and Short Selling held last January 9, 1998 at the PSE Conference Room, Ayala Avenue, Makati City, attended among others by representatives of the Pan-Asia Securities Lending Association (PASLA), Philippine Stock Exchange, Bureau of Internal Revenue, Bangko Sentral ng Pilipinas, and Securities and Exchange Commission, the issue on the registration of the Master Securities Lending Agreement (MSLA) and subsequent filing with the BIR of outstanding securities borrowing and lending transactions every six months for effective monitoring of these transactions was agreed upon. The MSLA is an umbrella agreement that covers all subsequent borrowing and lending transactions between the borrower and the lender. It stipulates the understanding between the borrower and the lender to engage in securities borrowing and lending, as well as the rights and obligations of each party, and the law would govern the agreement. cdt Furthermore, to signify their respective commitment to effectively address the issue covering Securities Borrowing and Lending and Short Selling in the Philippines, it was resolved to adopt a Memorandum of Agreement among the PSE, the SEC, and the BIR. Please find attached, the xerox copy of the draft MOA as well as our comment thereon dated February 11, 1998. For your information. Respectfully Submitted : (SGD.) ESTHER R. IBAEZ OIC, Assistant Commissioner (Legal Service)