BIR Ruling No. 604-12

November 5, 2012 BIR RULING NO. 604-12 Hon. Cesar V. Purisima Secretary Department of Finance Roxas Blvd., Manila Sir : This refers to your Memorandum dated 17 October 2012 requesting confirmation of your opinion that the formula described therein that will be applied to the onshore dollar treasury bonds (the "Bonds") is compliant with the National Internal Revenue Code of 1997, as amended (NIRC) and its implementing rules and regulations. Background In our Memorandum dated 4 May 2012, we confirmed (1) the taxes applicable to the issuance of and interest payment on the Bonds, and (2) that the Corporate Action Auto Claim System ("CAAC System") of the Philippine Dealing System (PDS) that will be used in the secondary market trading of the Bonds is compliant with the NIRC and its implementing rules and regulations. As represented, a key feature of the Bonds is the assumption by the Republic of the final withholding tax on interest due on the Bonds. This "tax assumption" feature is not novel inasmuch as it can be found in many financing transactions involving Philippine parties, some of which were the subject of past BIR rulings. For this transaction, the tax assumption feature was introduced to place the Bonds at par with the bonds issued by the Republic off-shore (commonly referred to as "ROP Global Bonds"), with which the Republic undertook to make whole its bond holders from Philippine taxes due on amounts they will receive by making such additional payments necessary to cover Philippine taxes. IaHCAD Moreover, the Bonds will be listed with the Philippine Dealing and Exchange Corp. ("PDEx"), thus allowing the Bonds to be traded freely using its trading platform. As a consequence, the trading of the Bonds will be subject to tax tracking using the existing CAAC System that is currently in use for the Multicurrency Retail Treasury Bonds ("MRTBs"). Notwithstanding the tax assumption feature of the Bonds, the CAAC System will be operationalized in the same manner as when it was last presented to the BIR. No change will be made to the CAAC System to accommodate the trading of the Bonds. This means that for any coupon period, the CAAC System will still track the following details: (1) which bondholder held the Bonds during the coupon period; (2) which tax rate is applicable to the bond holder ( i.e. , whether the bondholder is subject to final withholding tax ("FWT") at 0%, 10% or 20%); and (3) how many days the bondholder held the Bonds. It is further represented that this will be done all in the same way that the CAAC System currently tracks these details for the MRTBs. In particular, it was proposed in your letter that the FWT will follow the formula currently used for the OFW bondholders of the MRTB, to wit: FWT due = Interest Amount x FWT rate Based on the foregoing, you seek confirmation that the formula described above applicable to the Bonds, which uses the CAAC System for tax tracking, is compliant with the NIRC and its implementing rules and regulations. We reply as follows: TCDHIc 1. The use of the CAAC System for the Bonds' tax tracking is compliant with the NIRC and its implementing rules and regulations. We note that the CAAC System has been tested and is found compliant with the BIR's requirements under existing laws, rules and regulations. Thus it is not necessary to obtain further clearance or accreditation process that must be secured for the CAAC System to be used for the Bonds. 2. Given the tax assumption feature of the Bonds, the following formula shall be used for the computation of the FWT: FWT due = [Interest Amount/(1-FWT rate)] x FWT rate The CAAC System shall apply the said formula for purposes of computing the FWT on the Bonds. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue