BIR Ruling [DA-677-99]

December 10, 1999 BIR RULING [DA-677-99] Banco De Oro 12 ADB Avenue, Ortigas Center, Mandaluyong City Attention: Mr. Nestor V. Tan President Gentlemen : This refers to your letter dated November 22, 1999, requesting for an opinion on the following issues: 1) Whether or not your planned issuance of Long Term Commercial Papers (BDO-LTCPs) with maturities of more than five (5) years, available both to individual and corporate investors, qualifies as a certificate of indebtedness under the provision of Section 32(B)(7)(g) of the National Internal Revenue Code (NIRC), as amended by the Tax Reform Act of 1997, so that income or gains realized from the issuance, sale or exchange or retirement of these BDO-LTCPs are excluded from gross income and, therefore, exempt from income tax ; and 2) If in the affirmative, whether or not the exemption from income tax of the BDO LTCP will apply to both the Philippine Peso denominated and the U.S. Dollar denominated issues as well as to both the gains or income realized therefrom by both individual and corporate investors. 3) Whether or not the BDO LTCPs are subject to Documentary Stamp Tax (DST) UNDER Section 180 of the Tax Reform Act of 1997. It is represented that Banco de Oro, (BDO) is planning to issue Long Term Commercial Papers (BDO-LTCPs) with maturities of more than five (5) years, a portion of which will be denominated in Philippine Pesos and others in United States Dollars; that it is intended that these BDO-LTCPs will be sold in the capital market to encourage long-term investments and also generate a secondary market thereof among both individuals and corporate investors; that for this purpose, BDO has just obtained approval for this BDO LTCP issue both from the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC); that BDO LTCP qualifies as a certificate of indebtedness since the same is a borrowing by a bank which will be sold to 20 or more individual and corporate lenders/investors; that LTCPs are not among the ordinary or usual instruments enumerated under the definition of "deposit substitutes" such as promissory notes, repurchase agreements, certificates of assignment or participation and similar instruments with recourse; that BDO is not issuing any of these ordinary instruments, but is issuing a long-term commercial paper which is covered by special and specific registration rules by the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC), unlike the ordinary deposit substitute debt instruments which do not require such formalities and registration. In reply, please be informed that since the Banco De Oro Long Term Commercial Papers (BDO LTCPs) shall be offered directly by the bank to the general public, then such commercial papers are in the nature of investment securities. This is confirmed by the very definition of the term "commercial paper" as found under Revenue Regulations No. 7-77, thus: "Commercial paper" shall be defined as an instrument evidencing indebtedness of any person or entity, including banks and non-banks performing quasi-banking functions, which is issued, endorsed, sold, transferred or in any manner conveyed to another person or entity, either with or without recourse and irrespective of maturity. Principally, commercial papers are promissory notes and/or similar instruments issued in the primary market and shall not include repurchase agreements, certificates of assignment, certificates of participation, and such other debt instruments issued in the secondary market." The Revised Documentary Stamp Tax Regulation promulgated by the Department of Finance on September 16, 1924 (XXII O.G. 112, p. 2335), provides a very stable and acceptable definition of a "certificate of indebtedness". Thus, the term "includes only instruments, having the general character of investment securities as distinguished from instruments evidencing debts arising in ordinary transactions between individuals" (Section 9, ibid ). Securities in general are ' stock, stock rights, and debt instruments such as bonds, debentures, notes, or certificates issued by a corporation or government entity . For tax purposes, the Code often uses stock and securities in this sense following the generally accepted usage and application of the term, being any 'bond, debenture, note or certificate or other evidence of indebtedness by a corporation or government entity' (West's Tax Law Dictionary, 1993 edition). Under Section 32(B)(7)(g), NIRC of 1997 "gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years " is excluded from gross income. Since the maturity period of the BDO LTCP is over five years, income or gains realized from the issuance, sale or exchange or retirement of these BDO-LTCPs are excluded from gross income and, therefore, exempt from income tax . The exclusion in Section 32(B)(7)(g) of the Tax Code of 1997 covers both the Philippine Peso as well as the U.S. Dollar denominated BDO LTCP since the law does not distinguish on the denomination of the instrument, provided of course that it complies with the BSP as well as the SEC requirements for issuance of long-term commercial papers by a bank. For the same reason, this exemption will apply to both individual and corporate investors. Finally, the BDO LTCP's, although falling under the category of a " certificate of indebtedness " under Section 32(B)(7)(g) of the 1997 Tax Code for Income Tax purposes , is nevertheless in the nature of money-market instrument having the general character of a promissory note under section 180 of said Tax Code. Hence, for purposes of the documentary stamp tax, BDO LTCPs, both for the Philippine Peso and the U.S. Dollar denominated, would be at Thirty Centavos (P0.30) per Two Hundred Pesos (P200.00) or fractional part thereof, of the face value of the said BDO LTCPs. (BIR Ruling No. 166-99 dated October 25, 1999) EATCcI This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group