BIR Ruling [DA-296-05]

June 29, 2005 BIR RULING [DA-296-05] First Metro Investment Corporation 20th Floor, G.T. Tower International Ayala Avenue corner H.V. Dela Costa Street Makati City Attention: Mr. Danilo G. Olondriz Senior Vice President/Controller Gentlemen : This refers to your letter dated May 9, 2005 stating that First Metro Investment Corporation (FMIC) is an investment house with quasi-banking functions duly licensed by the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP); that under its quasi-banking functions, FMIC is authorized to borrow funds on a regular basis from more than nineteen (19) lenders at any one time through the issuance of any of the following types of debt instruments: a. Promissory Notes; b. Repurchase Agreements; and/or c. Certificates of Assignment/Participation with Recourse that these debt instruments are exempt from the SEC registration requirement per Section 9.2 of the amended implementing rules and regulations of the Securities Regulation Code (SRC); that the pertinent rules and regulations governing the exercise of quasi-banking functions are provided in Sections 4101Q and 42110Q of the BSP Manual Regulations for Non-Bank Financial Institutions; that presently, FMIC issues only one type of debt instrument, promissory note, for its deposit substitute borrowing operations and pays the corresponding documentary stamp taxes thereof; that aside from promissory note, FMIC plans to issue repurchase agreement as evidence of deposit substitute borrowing and shall comply with all the BSP requirements including the required features of this particular debt instrument prescribed under Subsection 4211Q.3 of the Manual; that the underlying debt instruments or securities which are the subject of a repurchase agreement may involve government securities, commercial papers and/or other negotiable or non-negotiable debt instruments; that BSP has no specific requirement on the type of the underlying debt instruments or securities securing this particular deposit substitute borrowing for as long as they are described on the face of the overlying instrument, the repurchase agreement, and made an integral part thereof; and that FMIC does not have a derivative license as it is not a prerequisite for the exercise of its quasi-banking functions which includes the issuance of repurchase agreements to document of its deposit substitute borrowings. In connection therewith, you now request a ruling that the repurchase agreements, to be issued by FMIC, are exempt from documentary stamp tax pursuant to Section 9 of Republic Act (R.A.) No. 9243. In reply thereto, please be informed that Section 9(h) of R.A. No. 9243, as implemented by Revenue Regulations No. 13-2004, provides that "xxx xxx xxx "(h) Derivatives: Provided, That for purposes of this exemption, repurchase agreements and reverse repurchase agreements shall be treated similarly as derivatives, shall be exempt from the documentary stamp tax." The term "financial institution" refers to banks, non-bank financial intermediaries performing quasi-banking functions , and other non-bank financial intermediaries including finance companies. This does not, however, include insurance companies. (Sec. 2, Revenue Regulations No. 9-2004) Quasi-banking activities shall refer to the borrowing of funds from twenty (20) or more personal or corporate lenders at any one time, through the issuance, endorsement or acceptance of debt instruments of any kind other than deposits for borrower's own account, or through the issuance of certificates of assignment or similar instruments, with recourse, or of repurchase agreements for purposes of relending or purchasing receivables and other similar obligations. Provided , however , that commercial, industrial and other non-financial companies, which borrows funds through any of these means for the limited purpose of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking functions. Considering that FMIC is a non-bank financial intermediary performing quasi-banking functions and is duly licensed by the Bangko Sentral ng Pilipinas (BSP) to act as such, the issuance of the repurchase agreements by FMIC falls within the purview of Section 9 of R.A. No. 9243. HDTISa SUCH BEING THE CASE, this Office holds that the repurchase agreements to be issued by FMIC are exempt from the documentary stamp tax pursuant to Section 9(h) of R.A. No. 9243, as implemented by Revenue Regulations No. 13-2004. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group