BIR Ruling [DA-144-01]

August 30, 2001 BIR RULING [DA-144-01] Department of Finance Roxas Boulevard Corner Vito Cruz Street Manila Attention: Ms. Ma. Lourdes B. Recente Director IV Gentlemen : We respond to your letter of August 13, 2001, in which you requested our comments on the points raised by AB Capital and Investment Corporation and the Investment House Association of the Philippines ("AB Capital" and "IHAP", respectively) in their respective letters of August 2, 2001 and April 17, 2001. We present in sequence below the questions raised in the above-mentioned letters and our corresponding comments. 1. Applicability of BIR Ruling Nos. 166-99 dated October 25, 1999 and 016-2000 dated January 7, 2000 to all investors in long-term government securities . BIR Ruling Nos. 166-99 and 016-2000 have not been revoked and therefore continue to apply to taxpayers that are similarly situated. However, the Bureau is presently reviewing the implementation of Section 32(B)(7)(g) of the Tax Code and the types of income that are covered by the exemption. The Bureau is considering the issuance of a regulation that will implement this section. 2. Whether the tax exemption givers to long-term government securities should apply to long-term commercial papers . Section 32(B)(7)(g) of the Tax Code applies to "(G)ains realized from the sale or exchange or retirement of bond, debentures or other certificate of indebtedness " with a maturity of more than five (5) years". Therefore, long-term commercial papers with maturity of more than 5 years are also included in the exemption. 3. Whether long-term capital market debt instruments should be exempted from tax on the ground that long-term bank deposits are exempt from the 20% final withholding ta x. The exemption of long-term bank deposits, among others, is governed by Section 24(B)(1) in relation to Section 22(FF) of the Tax Code and applies only to instruments issued by institutions regulated by the Bangko Sentral ng Pilipinas (BSP), to individuals. On the other hand, the exemption of long-term debt instruments is governed by Section 32(B)(7)(g) of the Tax Code and is wider in coverage, as it is not limited only to instruments issued by institutions regulated by the Bangko Sentral ng Pilipinas (BSP), nor to instruments that are issued exclusively to individuals. While the underlying intent of these two provisions might conceivably be identical, we do not believe that this fact alone should be used as basis for determining the tax treatment of interest on long-term debt instruments under Section 32(B)(7)(g) of the Tax Code. 4. Documentary stamp tax on secondary trading of capital market instruments . The question of whether secondary trading of capital market instruments is subject to DST depends on the provisions of Title VII of the Tax Code. The original issuance of bonds and deposit substitutes is subject to DST under Section 180 of the Tax Code at the rate of P0.30/P200 of the face value of the bonds issued. The same section does not tax the subsequent sale or transfer of such bonds. The issuance of debentures and certificate of indebtedness is subject to DST of P1.50/P200 of their face value under Section 174 of the Tax Code, while their subsequent sale is subject to DST of P1.50/P200 under Section 176 of the Tax Code. The issuance of shares of stock is subject to DST of P2/P200 par (or if no-par shares are issued, of actual consideration) under Section 175 of the Tax Code, while their subsequent sale is subject to DST1 of P1.50/P200 under Section 176 of the Tax Code. We understand that there is a move to eliminate DST on secondary trading of capital market instruments. However, this will require an amendment to the Tax Code. Please do not hesitate to call or write if you have any questions. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group