BIR Ruling [DA-491-04]

September 13, 2004 BIR RULING [DA-491-04] Sec. 22 (Y), 27 (D) (1), NIRC; RR 17-84 BIR Ruling No. 007-2204 Kawanihan Ng Ingatang-Yaman (Bureau of the Treasury) Intramuros, Maynila Attention: Mina C. Figueroa Treasurer of the Philippines M a d a m : This refers to your letter dated August 31, 2004 requesting for confirmation by way of a clarificatory ruling that the proposed issuance of a Fixed Rate Promissory Note by the Republic of the Philippines through the Department of Finance/Bureau of the Treasury (DOF/BTr) in favour of a single investor is not subject to the 20% Final Withholding Tax imposed under Section 27(D)(1) of the 1997 Tax Code. It is represented that the Republic intends to issue Fixed Rate Promissory Notes limited to one corporate or institutional lender; that as a feature of the PN, the holder/investor shall not be allowed to trade/sell the PN in the secondary market to more than one corporate or institutional buyer; that should the holder/investor opt to sell the PN holdings, it shall be required to trade/sell its "entire participation interest" in the PN, thus, preventing the splitting of the PN in favour of two or more investors; and that it is further represented that the Issuer will see to it that PN will be held by only one investor/lender during its entire life. BTr POSITION/OPINION BTr anchors its opinion on Sec. 22(Y) of the Tax Code of 1997 which defines the term "deposit substitutes" to 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 own 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, banker's acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered 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 . Since the proposed PN will be issued to one corporate or institutional lender only, the PN is taken out from the definition of a deposit substitute, thus, the income from the PN will not be subject to the 20% Final Withholding Tax imposed under Section 27(D)(1) of the 1997 Tax Code. Hence, this request. BIR REPLY We reply as follows: In BIR Ruling No. 007-2004 dated July 16, 2004, this Office has ruled that the mere issuance of government debt instruments and securities is deemed as falling within the coverage of "deposit substitutes" irrespective of the number of the lenders at the time of origination, and therefore interest income derived therefrom shall be subject to the applicable final withholding tax rate imposed on deposit substitutes as prescribed under the Tax Code of 1997. This ruling applies in general, to all kinds of debt instruments and securities and in particular, to Treasury bonds, notes and bills being issued by the Republic of the Philippines. Moreover, said BIR Ruling No. 007-2004 has completely abandoned previous BIR rulings which excepted ROP's debt instruments and securities from the definition of the term "deposit substitutes" whenever they are issued to less than twenty (20) individual or corporate lenders. In fine, Sec. 22(Y) of the Tax Code of 1997 qualifies a borrowing to be a "deposit substitutes" if the number of lenders at any one time of the issuance of a debt instrument or security is twenty (20) or more. Conversely, if there are less than twenty (20) individual or corporate lenders the borrowing is deemed not a "deposit substitutes." Thus, with the issuance of BIR Ruling No. 007-2004, the matter of determining the number of lenders does not come into play insofar as government debt instruments and securities are concerned. This Office also took note of your representation that the Fixed Rate Promissory Notes will be issued to one corporate or institutional lender and that the feature of the PN does not allow the holder/investor to trade/sell the PN in the secondary market to more than one corporate or institutional buyer or that should the holder/investor opts to sell the PN holdings, it shall be required to trade/sell its "entire participation interest" in the PN, thus, preventing the splitting of the PN in favour of two or more investors. With the new rule enunciated in the abovementioned BIR Ruling No. 007-2004 in respect to issuance of Government debt instruments and securities, we are therefore reinstating the applicable provision of Revenue Regulations (Rev. Regs.) No. 17-84, to wit: "SEC. 2. Definitions of Terms . . . . (h) "Deposit substitutes" shall mean xxx xxx xxx (iii) In the case of other non-financial companies, including the national or local government and its instrumentalities, all borrowings through the issuance of debt instruments denoted as treasury bonds, treasury bills, treasury notes, and similar instruments. In line with the foregoing definitions, the following borrowings shall be considered as deposit substitutes: xxx xxx xxx (b) All borrowings of the national and local government and its instrumentalities including the Central Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificates of indebtedness and similar instruments." Thus, we opine and hereby rule that notwithstanding the fact that there is only one corporate or institutional lender the mere issuance of such PN by the Republic will classify the borrowing as "deposit substitutes" pursuant to the abovecited Section 2(h)(iii)(b) of Rev. Regs. No. 17-84. Consequently, the interest income derived therefrom by the corporate or institutional lender shall be subject to the twenty percent (20%) final tax imposed under Section 27(D)(1) of the Tax Code of 1997. EACIaT This reiterates and clarifies BIR Ruling No. 007-2004. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group