BIR Ruling No. 516-12

August 3, 2012 BIR RULING NO. 516-12 National Home Mortgage Finance Corporation Filomena Bldg. III 104 Amorsolo St., Legaspi Vill.,Makati City Attention: Hon. Felixberto U. Bustos, Jr. NHMFC President Gentlemen : This is refers to the Residential Mortgage Backed Securities (RMBS) or Bahay Bonds (alternatively referred to as "BahayBonds2" or "BB2") by the National Home Mortgage Finance Corporation, to be issued mid-August of 2012. The National Home Mortgage Finance Corporation (NHMFC) is the Secondary Mortgage Institution established to develop and provide a secondary market for home financing institutions. NHMFC, through the Special Purpose Trust, will issue its second offering of Residential Mortgage Backed Securities (RMBS) or Bahay Bonds 2 to purchase additional housing loan receivables. As advertised, Bahay Bonds issued by the Special Purpose Trust, composed of current and performing loans from NHMFC's low delinquency residential loan portfolio. These were securitized by NHMFC to purchase additional housing receivables from public and institutional lenders. The terms of offering are: ICTHDE Issuer BAHAY BONDS 2 (Special Purpose Trust) Seller and Servicer National Home Mortgage Finance Corporation Issue and Listing Date August 17, 2012 Public Offer Period July 26, to August 07, 2012 Class A Senior Notes P300 Million Maturity Date August 17, 2017 Coupon Rate 4.80% Coupon Payment Quarterly and exempt from 20% withholding tax Form Scripless and registered with the PDTC Denomination Minimum of P5,000; additional amounts in multiples of P5,000 Rating PRS Aa by PhilRatings (Conditional rating to be affirmed upon close of the transaction) Guarantor Home Guaranty Corporation Cdpr The debt notes to be offered are classified into three, namely, Class A senior notes, Class B senior notes and Class C subordinated notes. NHMFC will issue P300 million worth of Class A senior notes. With life of five (5) years, they will be sold to retail investors and will carry a 4.80% interest rate. Interest income represented to be tax free and will be paid every quarter. Investors may purchase the Bahay Bonds from any Selling Agent's branch, subject to the documentary and minimum investment requirements. Investors will likewise be required to open a peso deposit account or designate an existing peso account where interest payment and principal redemption of the Bahay Bonds will be credited. Please be informed that the Bahay Bonds of NHMFC are deemed to be "deposit substitutes" as defined in Section 22 (Y) of the Tax Code of 1997, to wit: CacHES "The term shall mean an alternative form of obtaining funds from the Public (the term 'public' means the 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 or receivables and other obligations, or financing their own needs or the needs of their agents 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: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments." Since the object of the issuance is to obtain the required government funding, the issuance and subsequent distribution (exchange and trading) of debt instruments and securities in the secondary market to other market participants, specifically, the investors, is in itself a public borrowing of the government. The financial assets ( i.e., debt instruments and securities) in the hands of the investors represent a claim to future cash for which the borrowing entity, at maturity date, must have to pay. Section 27 (D) (1) of the Tax Code of 1997, as amended, imposes a final tax of 20% on such deposit substitutes, to wit: "(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: ..." IAcDET In view of the foregoing, this Office opines and so rules that mere issuance of government debt instruments and securities is deemed as falling within the coverage of "deposit substitutes" irrespective of the number of lenders at the time of origination. Accordingly, since government debt instruments and securities are not exempt from taxes, interest income derived therefrom shall be subject to the following: a) 20% final withholding tax imposed under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997, if the bondholder is an individual citizen or a resident alien, respectively; b) 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; c) 20% final tax imposed under Sections 27 (D) (1) and 28 (A) (7) (a), of the Tax Code, for domestic and resident foreign corporations, respectively; d) 32% final withholding tax, for nonresident foreign corporation under, Section 28 (B) (1) of the Tax Code, if the bondholder is nonresident foreign corporation; and, e) Such other rate that may be imposed under the appropriate tax treaty which the Philippines is a signatory. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue