Professional Documents
Culture Documents
Issue:
Whether or not Interest Income from the PEACe Bonds are subject to income tax, final withholding taxes,
or is tax exempt in view of the conflicting interpretation of the 20 Lender Rule?
Held:
The tax treatment of interest income from the PEACe bonds would vary depending on the number of lenders
(whether it is a deposit substitute or not) and on the classification of such lender, whether the lender is an individual
or a corporation.
Section 22 (Y) of NIRC defined the term deposit substitutes as an alternative form of obtaining funds from
the public (the term 'public' means 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
borrowers 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 dealer.
From the point of view of the financial market, the phrase at any one time for purposes of determining the 20
or more lenders would mean every transaction executed in the primary or secondary market in connection with the
purchase or sale of securities. The reckoning of 20 or more lenders/investors is made at any transaction in
connection with the purchase or sale of the Government Bonds, such as:
1.
2.
Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
Sale and distribution by GSEDs to various lenders/investors in the secondary market;
3.
Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually
through a broker or dealer; or
4.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or more
lenders/investors, there is deemed to be a public borrowing and the bonds at that point in time are deemed deposit
substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the imputed interest
income from the bonds. Debt instruments that do not qualify as deposit substitutes under the 1997 National Internal
Revenue Code are subject to the regular income tax.
In the case at bar, it appearing that the investors or lenders are all corporate entities, they are subject to final
withholding tax if the PEACe bond when it was acquired by them is properly classifiable as a deposit substitute.
Should the PEACe bond not qualify as a deposit substitute it should be included as an item of Gross Income subject
to the regular income tax. Should the PEACe bond qualify as a deposit substitute and the lender is an individual, the
interest income is tax exempt.