Taxability of Floating Rate Treasury Notes

June 25, 1991 BIR RULING NO. 119-91 21 24 036-88 119-91 S i r : This refers to your letter dated May 7, 1991 stating that the national government is contemplating on the issuance of a floating rate Treasury Note with a tenor of 3 years; that because of the 3-year tenor, it is expected that there will be some secondary market trading of the Treasury Note among investors involving transfer of ownership of the Treasury Note from sellers to buyers. cdt In connection therewith, you now request opinion on the following queries: (1) The floating rate Treasury Notes are envisioned to be issued in bearer from the transfer of ownership in the secondary market shall be via simple delivery of the certificate. Is the transfer of ownership by way of simple delivery to the buyer subject to DST under the Tax Code?; (2) It is impossible that during declining interest rates, an investor is able to sell the floating rate of Treasury Notes at a premium in between interest setting dates. Can this premium or income from trading on the floating rate Treasury Notes be treated as interest income and taxed at the 20% final tax rate? We understand that income arising from trading in Treasury Bill are being treated as interest income and subjected to the 20% final withholding tax. In reply thereto, I have the honor to inform you that since the Treasury Notes to be issued by the National Government are considered as deposit substitutes which are alternative forms of obtaining funds from the public, other than deposits through the issuance, endorsement or acceptance of debt instruments for the purpose of financing its own needs (public expenditures) [Sec. 20(y), Tax Code as amended by P.D. No. 1959; Secs. 2(b) & (h), Rev. Regulations No. 17-84 dated October 12, 1984,] their original issue shall be subject to the documentary stamp tax of twenty centavos on each two hundred pesos or fractional part thereof of the face value of such Treasury Notes pursuant to Section 180 [formerly Sec. 229, Tax Code now renumbered as Sec. 180 by E.O. No. 273] of the Tax Code, as amended by P.D. No. 1959. However, since the floating rate treasury notes with a tenor of 3 years are in bearer form, the transfer of said notes in the secondary market by way of simple delivery to the buyer is not subject to the documentary stamp tax. [Secs. 6 and 10, Documentary Stamp Tax Regulations] In other words, unless the transfer of treasury notes carries with it the renewal or issuance of new treasury notes in the name of the transferee to replace the old ones, no documentary stamp tax shall accrue on such transfer. Moreover, the yield or any other monetary benefit from said floating rate treasury notes is subject to the 20% final withholding tax under Section 21 (c) (1) or Section 24 (e) (1) in relation to Section 50 (a) all of the Tax Code, as amended. Finally, the premium or income from trading of said treasury notes is subject to income tax at the rates prescribed under Section 21 (a) of the Tax Code in case of a citizen or resident trader, or as prescribed under Section 24 (a) in case a domestic corporation trader. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner