May 31, 2001

BIR RULING NO. 020-01

Caucus of Development NGO Networks

2/F CCS Bldg. Social Development Complex
Ateneo de Manila University
Loyola Heights, Quezon City

Attention: Ms. Ma. Socorro Camacho-Reyes

Chairperson
and
Mr. Danilo A. Songco
National Coordinator

Gentlemen :

This refers to your letters dated May 10, 15 and 25, 2001 requesting for
con rmation of your opinion that by the very nature of zero coupons, the PEACe Bonds,
when sold to investors at a deep discount, the gains realized therefrom are exempt
from capital gains tax pursuant to Section 32(B)(7)(g) of the 1997 Tax Code.
It is represented that since mid February this year, CODE-NGO has been working
towards the establishment of Hanap Buhay® Fund to contribute to the government
anti-poverty program; that it would entail the otation of up to Php15,000,000,000.00
(Fifteen Billion Pesos) special issue, 10-year zero-coupon Treasury Notes (T-Notes)
eligible as secondary reserves and for agri-agra compliance purposes; that the bonds
were renamed Poverty Eradication and Alleviation Certi cates (PEACe Bonds) for
public relations purposes; that CODE-NGO will purchase the T-Notes/PEACe Bonds,
and immediately resell these at a premium to prospective investors on a fully
underwritten basis; that upon full issuance of the Bonds, civil-society expects to raise
some Php1,000,000,000.00 (one Billion Pesos) after otation expenses to serve as a
permanent endowment and capital fund that will support micro-credit and capacity
building projects for the poor; that the Monetary Board has approved in principle your
request for the grant of such eligibilities to the PEACe Bonds subject to their issuance;
that among the salient features of the PEACe Bonds are as follows:
Rationale for the Issue : Deepening of the capital markets

Issuer : Republic of the Philippines

Instrument : 10-year, zero-coupon Treasury Notes (T-Notes)

Issue Manager : RCBC Capital Corporation

Face Amount : Up to Php 15.0 Billion

Issue Price : The T-Notes do not pay interest throughout its

entire life; in lieu thereof, these are sold at an
appropriate discount to give prospective
investors the same gross equivalent yield as
other fixed income instruments of comparable
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 risk and tenor.

Term of Maturity : Ten (10) years

Redemption Schedule : In one lump sum at maturity date of the Issue

Yield-to-Maturity : As determined by the market, which for

purposes of the Issue, shall be the bid yield of the
most recent "on-the-run" 10-year FXTN issue as
shown on the Bloomberg MARTI page at 11:30
a.m. on Issue Date.

Form : Uncertificated, to be registered with the Registry

of Scripless Securities (ROSS)

Manner of Offering : Through a firmly underwritten private

placement

Security of the Issue : Direct, unconditional and general obligation of

the National Government

Firms Eligible (to Purchase) : Government Securities Eligible Dealers

(GSEDs) and any other financial institutions as
provided under Section 28 of the Department of
Finance Order No. 141-95, as amended, Series
of 1995.

Other Features : Freely tradeable and transferable

that you posited that the issuance of PEACe Bonds by the Philippine Government are
necessary to borrow funds to meet public expenditures authorized by law or to provide
for the purchase, redemption or refunding of any obligations, either direct or
guaranteed, of the Philippine Government, hence, essentially, they are classi ed as
certi cates of indebtedness; that further, the issuance of PEACE Bonds, is by its nature,
a sale of certi cate of indebtedness ; that issuance thereof quali es as a sale of bonds,
debentures and certi cates of indebtedness; that PEACe Bonds are not deposit
substitutes and consequently not subject to withholding tax; that your opinion is
premised on the fact that the PEACe Bonds will be issued to only one buyer, i.e., Code
NGO; that assuming the discount can be treated as an interest income, the 20% nal
withholding tax imposed under the 1997 Tax Code applies only to interest income
derived from bank deposits and deposit substitutes; that one of the conditions to be
classi ed as deposit substitutes, as de ned in Section 22 (Y) of the 1997 Tax Code is,
the "alternative form of obtaining funds from the public [the term "public" means
borrowings from twenty (20) or more individual or corporate lenders at any one time]
other than deposits . . .", which fact is lacking in the proposed oatation of PEACe
Bonds; that the withholding tax on interest income will apply only if a debt instrument is
issued to twenty (20) or more individuals or corporate lenders; and neither any gain or
income derived from PEACe Bonds will be subject to income tax, whether as a result of
the discount or of its subsequent sale to nancial institutions, otherwise there will be
no occasion or situation where the tax exemption granted under Sec. 32(B)(7)(g) of the
1997 Tax Code will ever apply considering that the gain corresponding to the discount
will actually be realized only upon retirement of the PEACe Bonds.

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 In reply, please be informed that your opinion is hereby confirmed as follows:
As defined in Section 22(Y) of the 1997 Tax Code, to wit:
"The term "deposit substitutes" 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 nancing 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, certi cates 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 ve (5)
days to cover de ciency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit
substitute debt instruments."

Thus, to be classi ed as "deposit substitutes", the borrowing of funds must be

obtained from twenty (20) or more individuals or corporate lenders at any one time. In
the light of your representation that the PEACe Bonds will be issued only to one entity,
i.e., Code NGO, the same shall not be considered as "deposit substitutes" falling within
the purview of the above de nition. Hence, the withholding tax on deposit substitutes
will not apply.
Furthermore, gains from the sale, exchange, or retirement of the PEACe bonds
shall not be subject to the twenty percent (20%) nal withholding tax imposed under
Section 27(D)(1) of the Tax Code, since the gains that may be derived from PEACe
Bonds with maturity of more than ve (5) years, shall be exempt from income tax as
provided for under Section 32(B)(7)(g) of the 1977 Tax Code pertinent portion of which
reads as follows, viz.:
"(g) Gains from the sale of bonds, debentures or other certi cates of
indebtedness. — Gains realized from the sale or exchange or retirement of bonds,
debentures or other certi cate of indebtedness with a maturity of more than ve
(5) years" shall not be included in gross income and shall be exempt from
taxation.

The exemption from income tax and from the withholding tax on the income
derived from the sale of bonds with maturity of more than ve (5) years is given by law
as an incentive to encourage cash savings in such investment securities and to develop
both the capital market as well as the secondary market for these investments. Thus,
the appellation, kind or form under which the bonds come is immaterial for the purpose
of recognition of the income tax exemption for so long as the gains are derived from
bonds with maturity of more than five (5) years.
Finally, Section 180 of the same 1997 Tax Code speci cally provides that bonds
are among those subject to documentary stamp tax ". . . at the rate of Thirty Centavos
(P0.30) on each Two-Hundred Pesos (P200) or fractional part thereof, of the face value
. . ." of such instrument. There is therefore no legal basis to further exempt the PEACe
Bonds from the payment of the documentary stamp tax notwithstanding the fact that,
pursuant to Section 32(B)(7)(g) of the 1997 Tax Code, bonds with maturity of more
than 5 years are exempt from income tax.
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 This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it shall be disclosed that the facts are different, then this
ruling shall be considered null and void. IECAaD

Very truly yours,

(SGD.) RENÉ G. BAÑEZ

Commissioner of Internal Revenue

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