Tax Exemption of Bonds Issued by the Bureau of the Treasury

January 7, 2000 BIR RULING NO. 016-00 Sec. 32 (B) (7) (g) 166-99 016-200 Mdm . Leonor Magtolis Briones Treasurer of the Philippines Bureau of the Treasury Intramuros, Manila Dear Madam : This refers to your letter dated January 6, 2000 requesting, in effect, for a ruling with respect to the exemption from taxes of bonds issued by the Bureau of the Treasury. LibLex It is represented that the Department of Finance (DOF) through the Bureau of the Treasury (BTr) has been mandated to issue bonds (with maturity of 2, 5, 7, 10, 20 years for a minimum amount of P100,000.00) as well as Small Denominated Treasury Bonds (SDT-Bonds for a minimum amount of P5,000.00) for the Republic; that since the time BTr assumed the fiscal agency function in 1997, it has consistently deducted the 20% final withholding tax on the interest/coupon earned by the bondholders; that in an opinion dated October 25, 1999 issued to Aegon Life Insurance Inc., the BIR held that "interest income or yields or gain from the sale of bonds, debentures and certificates of indebtedness with maturity of more than five (5) years are excluded from the gross income in accordance with Section 32(B)(7)(g) of the Tax Code of 1997 and therefore exempt from the 20% final withholding tax on deposit substitutes"; that in view of the said ruling, you would like to be clarified on the following issues: 1. Should the Bureau of the Treasury stop withholding the 20% final tax? If so, when is the effectivity of said ruling?; 2. Shouldn't the government also stop paying the documentary stamp tax?; 3. Should the exemption apply to both regular and SDT-Bonds?; and 4. Should the exemption apply only to the coupon or can it also apply to the principal if it is issued at a discount and/or at a premium? In reply, please be advised as follows: A. Section 32(B)(7)(g) of the Tax Code of 1997 otherwise known as the NIRC of 1997 provides that " 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 " are excluded from gross income, hence, exempt from income tax, effective January 1, 1998. This, if the maturity period of the bonds issued through the BTr will be more than five (5) years , the gains that may be derived therefrom by the bondholders shall accordingly be exempt from income tax. Consequently, such gains are also exempt from the 20% final withholding tax. (BIR Ruling No. 166-99 dated October 25, 1999) B. Section 180 of the Tax Code of 1997 specifically provides that bonds are among those subject to documentary stamp tax ". . . at the rate of Thirty Centavos (P0 . 30) on each Two Hundred Pesos (P200) or fractional part thereof, of the face value . . ." of such instrument. There is therefore no legal basis to exempt bonds of all classes from the payment of the documentary stamp tax notwithstanding the fact that, pursuant to Section 32 (B) (7) (g), bonds with a maturity period of more than 5 years are exempt from income tax. C. The exemption from income tax and withholding of bonds with maturity period of more than five (5) years is given by law as an incentive to encourage cash savings in such investment securities and to develop both the capital market as well as the secondary market for these investments. Thus, the appellation, kind or form under which the bonds come is immaterial for the purpose of the recognition of the income tax exemption for so long as the gains are derived from bonds maturing after the statutory period of more than five (5) years. Consequently, gains derived from the sale or exchange or retirement of both your regular bonds or Small Denominated Treasury Bonds (SDT-Bonds) with stated maturity of 7, 10 or 20 years are covered by the exemption. D. Since the law speaks of the exclusion from gross income of all gains derived from long term investments, it follows that embraced thereunder are income, yield or interest, which are all synonymous with gains, whether discounted or at a premium. Thus, the exemption applies to interest/coupon or profit from the principal of such long-term regular or SDT bonds complying with the statutory maturity period. cdlex E. Pursuant to Section 246 of the Tax Code of 1997 providing for non-retroactivity of rulings, the ruling of this Office is prospective in application and generally takes effect only upon its issuance. Thus, the Btr is hereby authorized to stop the withholding of the 20% tax from such long-term bonds effective as of the date of the issuance of this ruling. 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue