Taxation of Bases Conversion and Development Authority (BCDA) Bonds

April 29, 2002 BIR RULING NO. 017-02 Sections 24 (B) (1), 27 (D) (1), 28 (A) (7) 22 (Y), 180 BIR Ruling Nos. 020-2001; 035-2001, 050-2001 Bases Conversion and Development Authority BCDA Corporate Center Gozar corner Lucas Streets Villamor Airbase, Pasay City Attention: Mr. Isaac S. Puno Executive Vice President Gentlemen : This refers to your letters dated January 21, 2002, February 4, 2002 and March 4, 2002 requesting confirmation of your opinions on the taxation of BCDA Bonds '07. It is represented that the Bases Conversion and Development Authority ("BCDA") is a government-owned-and-controlled corporation created by virtue of Republic Act No. 7227, as amended; that it is mandated to undertake the accelerated, sound and balanced conversion into alternative uses of the former US Military baselands, including Subic, Clark and their extensions, like John Hay, Poro Point and Morong, Bataan; that in the conversion program, BCDA is also mandated to promote the economic and social development of Central Luzon, in particular, and the country, in general; that under Section 5(d) of its Charter, BCDA is expressly granted the power to issue bonds; that BCDA's plans and programs for the next five (5) years are driven by, among others, the thrust to develop special economic zones (SEZs), namely: Clark, John Hay, Poro Point and the Bataan Technology Park, to create more jobs and generate investments in these zones; that in line with this thrust, a major BCDA project is the Subic-Clark-Tarlac Expressway Project, which is one of the five flagship projects of the Arroyo Administration; that the project aims to synergize the efforts of the two zones in developing a world-class, multi-modal logistics hub and industrial corridor in the region; that the project will also enable both the Clark and Subic Special Economic Zones to share resources, infrastructure and facilities in particular the Diosdado Macapagal International Airport; that BCDA intends to issue P2.0 billion worth of bonds due 2007 (BCDA Bonds '07) the proceeds of which will be used to partially finance this project, the development of SEZs, and other infrastructure projects, as well as the retirement of the P1.0 billion bridge loan used to initially finance such infrastructure projects; that the salient features of BCDA Bonds '07 are as follows: Issuer : Bases Conversion and Development Authority BCDA Corporate Center, Gozar Street Villamor Air Base, Pasay City Bond Amount : P2.0 billion Issue Price : At par Maturity : 5 years and 1 day from Issue Date Base Rate : [Market determined] Coupon Rate : 200 basis points over the Base Rate, fixed over the term of the BCDA Bonds, payable quarterly in arrears Redemption : In one lump sum at maturity date Security : Mortgage over real properties with minimum bond to collateral ratio of 60:100 Lead Underwriter : Development Bank of the Philippines Sen. Gil Puyat Avenue car. Makati Avenue Makati City Participating Underwriters : (to be determined at a later stage) Bond Counsel for the Issuer : Office of the Government Corporate Counsel 3rd Floor MWSS Bldg. Old Balara, Quezon City Corporate Counsels, Phils Law offices 1905 Security Bank Center 6775 Ayala Avenue, Makati City Bond Counsel for the Underwriting Syndicate : Picazo Buyco Tan Fider & Santos Law Offices 8th Floor, Singapore Airlines Bldg. 138 H.V. dela Costa St., Salcedo Village Makati City MTI Trustee : Development Bank of the Philippines Trust Services Makati City Bond Agent : Metropolitan Bank and Trust Company Trust Banking Group Metrobank Plaza, Sen. Gil Puyat Global Financial Advisors : Corporate ACCESS Holdings, Inc. West Ave. cor. Ligaya St. West Triangle, Quezon City ATR-Kim Eng Capital Partners, Inc. 17th Floor Tower One & Exchange Plaza that the BCDA Bonds '07 will be offered through an Underwriting Syndicate with the Development Bank of the Philippines (DBP) as Lead Underwriter; that the required participation of the participating underwriter is a minimum of P100 million, with multiples of P50 million above the minimum, while that of a direct investor is a minimum of P50 million, with multiples of P10 million above the minimum; that with DBP firmly underwriting P1.0 billion, it is expected that at the time of origination there will be less than twenty (20) subscribers to the BCDA Bonds '07; that the BCDA Bonds '07 will be evidenced by a Global Bonds Certificate to be held in trust by the Metropolitan Bank and Trust Company-Trust Banking Group, as bonds agent; that only one bond certificate will be issued, and as far as BCDA is concerned, only MBTC-Trust is the holder of the bonds; that to evidence investor's participation in the Global Bond Certificate; including secondary sales/transfers of participation, the bond agent shall issue confirmations of participation or confirmations of sale; that no new bonds will be issued in the name of the transferees; that per April 25, 2002 letter of Development Bank of the Philippines, the Offering Period for the BCDA Bond '07 ended on April 24, 2002, with the following being the only applicants: Name and Address of Applicant Amount of Bonds to be Purchased 1. Development Bank of the Philippines P1,000,000,000 (for its account) Sen. Gil Puyat J. Avenue Makati City 2. UCPB-Trust Banking Division 100,000,000 (for its own account) 5th Flr., UCPB Building, 7907, Makati Ave., Makati City 3. DBP-Trust Services 50,000,000 [for the accounts of (i) DBP Gratuity Plan Fund and (ii) Blue Chip Fund] Sen. Gil J. Puyat Avenue Makati City 4. Corporate Guarantee & Insurance Co., Inc. 50,000,000 (for its own account) Angeles, Pampanga ase the BCDA Bonds `07, Heritage Park Management Corporation is also applying to purchase P50,000,000 worth of BCDA Bonds '07; that consequently, there will be less than twenty (20) holders of the BCDA Bonds '07 at the time of origination; and that you now request confirmation of the following: "1. Assuming that there will be less than twenty (20) subscribers at the time of the origination of the BCDA Bonds, the coupon or interest on the bonds is not subject to the 20% final withholding tax on deposit substitutes (BIR Ruling No. 020-2001 dated May 31, 2001; BIR Ruling No. 035-2001 dated August 16, 2001); "2. It is only the number of subscribers at the time of origination of the BCDA Bonds that is critical in determining whether or not the BCDA Bonds will be considered as deposit substitutes, because it is from these subscribers that BCDA will borrow. In other words, the number of transferees in the secondary market for the BCDA Bonds will not affect the taxation of the coupon on the BCDA Bonds (because the purchase price that will be paid by the transferee will flow to the transferors, and not to BCDA; "3. Gains from sale, exchange or retirement of the BCDA Bonds '07 are excluded from gross income and, therefore, exempt from income tax pursuant to Section 32(B)(7)(g) of the Tax Code of 1997 (BIR Ruling No. 020-2001 dated May 31, 2001; BIR Ruling No. 035-2001 dated August 16, 2001); "4. The original issuance of the BCDA Bonds '07 is 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 the bonds (Section 180, Tax Code of the 1997); and "5. Considering that new bonds will NOT be issued in the name of the transferees, transfers of the BCDA Bonds '07 will not be subject to documentary stamp tax pursuant to Section 6 of Revenue Regulations No. 26, the DST Regulations, which provides: "Section 6. Transfer of bonds, debentures, etc. No documentary stamp tax accrues on mere transfers of bonds, debentures, or certificates of indebtedness issued by any association, company or corporation, but where the transfer of the bonds carries with it the issuance of new bonds in the name of the transferee to replace the old ones, the tax imposed on the issuance of the bonds should be paid." (See also BIR Ruling No. 119-91 dated June 25, 1991 and BIR Ruling No. 050-2001 dated October 29, 2001) In reply, please be informed that your opinions are hereby confirmed as follows: 1. Under Sections 24 (B) (1), 27 (D) (1), 28 (A) (7) in relation with Section 22 (Y), all of the Tax Code of 1997 (Tax Code), a final tax at the rate of twenty percent (20%) is imposed on "interest on any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements". While Section 2 (h) (iii) (b) of Revenue Regulations No. 17-84 considers all borrowings of the national and local government and its instrumentalities including the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas), evidenced by debt instruments denoted as treasury bonds, bills, notes, certificate of indebtedness and similar instruments as "deposit substitutes", Section 22 (Y) of the Tax Code defines the term as follows: "The term "deposit substitutes" refers to alternative form of obtaining funds from the public (the term public means borrowing from 20 or more individuals 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 debtor. . . " In the light of the aforecited Section 22 (Y) of the Tax Code, this Office has consistently opined that to be considered as "deposit substitutes" subject to twenty percent (20%) final withholding tax, the borrowing of funds must be obtained from twenty (20) or more individuals or corporate lenders at any one time. (BIR Ruling No. 020-2001 dated May 31, 2001) In line with your representation that since BCDA Bonds '07 were offered through an Underwriting Syndicate with the Development Bank of the Philippines (DBP) as Lead Underwriter, with a required participation of the participating underwriter in the minimum amount of P100 million, with multiples of P50 million above the minimum, and P50 million, with multiples of P10 million above the minimum from a direct investor and with DBP firmly underwriting P1.0 billion, as well as the fact that, at the time of the close of the Offering Period on April 24, 2002, which is the time of origination, there were in fact less than twenty (20) subscribers, BCDA Bonds '07 may not be classified as 'deposit substitutes'. Accordingly, interest income derived therefrom shall be subject to the following: a) ordinary income tax at the schedular rate imposed under Section 24 (A)(1)(c) of the Tax Code, if the bondholder is an individual citizen or a resident alien; b) 20% tax if the bondholder is a nonresident alien engaged in trade or business within the Philippines under Section 25 (A) (2) of the Tax Code; c) 25% tax imposed under Section 25(B) of the Tax Code, if the bondholder is a nonresident alien individual not engaged in trade or business within the Philippines; d) corporate income tax of 32% or 2% minimum corporate income tax imposed under Section 27 (A) and 27 (E), and 28 (A) (1) and (2), respectively, of the Tax Code, for domestic and resident foreign corporations; e) 32% final withholding tax, for nonresident foreign corporation; and, f) Such other rate that may be imposed under the appropriate tax treaty to which the Philippines is a signatory. 2. For purposes of determining whether the borrowing is from the "public", the number of investors shall be counted as of the time of origination or original issuance regardless of whether the bonds are thereafter traded or sold in the secondary market. However, a representation or warranty should be made to the effect that the bonds are acquired upon their original issuance by the original purchaser thereof, for and on its own behalf, or on behalf of a single purchaser only, and in the latter case, that the purchaser is acquiring such bonds for its own account and not for the account of other entities. (BIR Ruling No. 035-2001 dated August 16, 2001). 3. As consistently ruled by this Office, gains from the sale, exchange, or retirement of bonds with maturity of more than five (5) years, shall be exempt from income tax provided for under Section 32 (B) (7) (g) of the Tax Code, the pertinent portion of which reads as follows: " (g) Gains from the sale of bonds, debentures or other certificates of indebtedness. 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" shall not be included in gross income and shall be exempt from taxation. Since BCDA Bonds '07 have a tenor of 5 years and 1 day, any gain realized from its sale or exchange or retirement is excluded from the gross income; hence, exempt from income tax pursuant to the above-cited Section 32 (B) (7) (g) of the Tax Code. The term "gain" shall refer to the gain, if any, from secondary trading which is the difference between the selling price of the bonds in the secondary market and the price at which the bonds were purchased by the seller. The term "gain' shall also include the gain (that is, the difference between the proceeds from the retirement of the bonds and the price at which such last holder acquired the bonds) realized by the last holder of the bonds when such bonds are surrendered for retirement upon their maturity. (BIR Ruling No. 035-2001 dated August 16, 2001) The term "gain" however, does not include "interest" ( Nippon Life Insurance Company of the Philippines, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6142; promulgated February 4, 2002), which, as stated, is subject to income tax as described above. 4. The original issuance of the BCDA Bonds '07 shall be subject to DST at the rate of P0.30 for every Two hundred Pesos (P200.00) or fractional part thereof of their face value pursuant to Section 180 of the Tax Code. 5. Finally, the transfer of BCDA Bonds '07 in bearer form in the secondary market by way of simple delivery to the buyer is not subject to the DST unless the transfer of the instruments carries with it a renewal or issuance of new instruments in the name of the transferee to replace the old ones. (BIR Ruling No. 050-2001 dated October 29, 2001) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, the this ruling shall be considered null and void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue