BIR Ruling [DA-175-01]

September 29, 2001 BIR RULING [DA-175-01] Sec. 22 (Y); BIR Rlng. No. 020-2001 Bureau of the Treasury Intramuros, Manila Attention: Atty. Gisela I. Lood Officer-in-Charge Gentlemen : This refers to your letter dated September 27, 2001 seeking confirmation of BIR Ruling No. 020-2001 dated May 31, 2001 and the Clarificatory Ruling dated August 16, 2001 stating in effect that the proposed issuance of PEACe Bonds, not being considered "deposit substitutes", are not subject to the twenty percent (20%) withholding tax declaring, thus: "It should be noted that at the time of the issuance or origination of the PEACe Bonds, there is no borrowing from the public since the bonds are being issued only to one entity, that is, RCBC. It has been the practice of the BSP that debt instruments and certificates are being issued only to banks and/or financial institutions. The required issuance to more than 20 individual or corporate lenders in order that the transaction be considered a borrowing from the 'public' is not present in the instant case." and whether or not the phrase "at any one time" found in the definition of "deposit substitutes" as stated in the aforesaid BIR rulings, to wit: "In this particular instance, the phrase "at any one time" covers only the origination or original issuance of the bonds regardless of whether sale or trading is made in the secondary market. Thus, in the case of PEACe Bonds, the determining factor in ascertaining whether such bonds are "deposit substitutes", is the fact of their original issuance to a single entity, RCBC". is applicable in other cases of issuances or only to the proposed issuance of the PEACe Bonds; and that in relation thereto, you submitted a copy of the Term Sheet of the proposed 10 YEAR ZERO COUPON TREASURY BONDS (PEACe Bonds) to wit: "10-YEAR ZERO-COUPON TREASURY BONDS Poverty Eradication & Alleviation Certificates (PEACe Bonds) TERM SHEET Authorized Amount : Up to Php 50.0 Billion Rationale of the Issue : Deepen the domestic capital market Lengthen the maturity profile of the Republic's liabilities Poverty eradication and alleviation Issue Price : At a Discount Term : Ten (10) years Redemption : In one lump sum at maturity date of the issue Yield to Maturity : Market determined Form : Uncertificated, to be registered with the Registry of Scripless Securities Manner of Offering : Through auction, tap, firm underwriting, or combined bookbinding & public offering Taxation : Not subject to 20% withholding tax as per BIR Ruling No. 020-2001 of May 31, 2001 Eligibilities : Eligible as liquidity reserves Security of Issue : Direct, unconditional and general obligations of the National Government Firms Eligible : Government Securities Eligible Dealers and any financial institutions (as provided under Section 36 of Department of Finance Order No. 141-95, as amended) not exceeding 19 lenders Sinking Fund : A sinking fund shall be established." We hereby confirm the foregoing rulings, after taking into account the above-stated features of the proposed PEACe bond issuance: I. As defined in Section 22(Y) of the 1997 Tax Code, the term "deposit substitutes" as an alternative form of obtaining funds from the "public" requires that the borrowing must be made from twenty (20) or more individual or corporate lenders at any one time. Corollarily, if the proposed PEACe Bonds are issued to less than twenty (20) individual or corporate lenders, the borrowing shall not be considered as "public" borrowing. Hence, the instrument shall not be classified as "deposit substitutes". II. In connection with your query as to the meaning of the phrase "at any one time" as an element of public borrowing in order that the same may be considered as "deposit substitutes", we hereby reiterate that the phrase ' at any one time ' covers only the origination or original issuance of the bonds regardless of whether sale or trading is made in the secondary market. However, in the case of PEACe Bonds, since the determining factor in ascertaining whether or not such bonds are 'deposit substitutes' is the original issuance to more than twenty (20) individual or corporate lenders, it holds to say that the issuance to less than 20 individual or corporate lenders will necessarily exclude them from the coverage of "deposit substitutes". Such being the case, the time element, i.e., " at any one time " required in "public "borrowing" shall not apply in the instant case. This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it shall be discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue