Tax Treatment of Funds Used by Banks in the Purchase of Reconstruction Bonds.

February 13, 1991 REVENUE REGULATIONS NO. 01-91 SUBJECT : Tax Treatment of Funds Used by Banks in the Purchase of Reconstruction Bonds TO : All Internal Revenue Officers and Others Concerned SECTION 1 . Scope . Pursuant to the provisions of Section 245 in relation to Sections 28 (b) (4) and 29(b)(1) of the National Internal Revenue Code, these regulations prescribing guidelines in the tax treatment of funds used by the banks in the purchase of Reconstruction Bonds issued by the government in its efforts to rehabilitate the earthquake-damaged areas pursuant to and in accordance with Republic Act No. 245, as amended, are hereby promulgated. acd SECTION 2 . Definition of terms . For the purpose of these regulations, unless the context otherwise indicates, the following definition of terms are hereby adopted: (a) Reconstruction Bond evidence of indebtedness issued by the Philippine Government as its direct and unconditional obligation pursuant to and in accordance with the provisions of Republic Act No. 245, as amended, in registered or bearer form at the option of the investor, in denominations of One Hundred Thousand (P100,000) Pesos, One Million (P1,000,000) Pesos and Ten Million (P10,000,000) Pesos. (b) Interest Income earnings derived from investments in Reconstruction Bonds consisting of yield or interest of 14% per annum . acd (c) Funds with cost money used to purchase or invest in Reconstruction Bonds with interest. (d) Funds without cost funds used by banks to purchase or invest in Reconstruction Bonds without paying for interests thereon. (e) Investor includes all persons, including banks, purchasing or investing funds in Reconstruction Bonds. SECTION 3 . Nature and Treatment of Interest on Reconstruction Bonds . (a) The interest income of 14% per annum shall be exempt from income tax, e.g., the 20% final withholding tax. (b) If the recipients of the above-mentioned interest income are banks, the same shall not be included as part of the tax base upon which the gross receipt tax (Sec. 119 of the Tax Code) is imposed. (c) Reconstruction Bonds shall be subject to documentary stamp tax. SECTION 4 . Nature and Treatment of Reconstruction Bond Funding . Investments in Reconstruction Bonds that come from funds without cost. i.e., the unimpaired capital accounts and/or non-interest bearing deposits shall be subject to certain substantiation requirements. SECTION 5 . Substantiation Requirements . The banks should present to the Bureau of Internal Revenue the following: 1. Interim Financial Statement as of the end of the month immediately preceding the date of purchase or investment in bonds; 2. Sworn Statement submitted to the Central Bank on the financial condition of the bank; and 3. Liquidity Statement for the period prior to the date of purchase of investment in Reconstruction Bonds. For purposes of determining the amount of available interest-free funds, the investment in bank premises and in acquired assets of the bank shall be deducted from total available or unimpaired fund. If after the submission of the above document, it would appear that funds issued to purchase the bond bear interest, i.e., funds with cost, then Section 29(b)(1) of the Tax Code shall apply. aisa dc SECTION 6 . These regulations shall take effect immediately and shall apply only to the purchase/investment on Reconstruction Bonds for earthquake-damaged area. (SGD.) Jesus P. Estanislao Secretary of Finance Recommending Approval: (SGD.) JOSE U. ONG Commissioner of Internal Revenue