April 28, 2010

BIR RULING [DA-(FIT-002) 054-10]

24 (B) (1), 25 (A) (2), (B), 27 (D) (1),

28 (A) (7) (a), 121, 179; BIR Ruling
Nos. 007-04, DA-022-06A, DA 050-07

Bureau of the Treasury

Intramuros, Manila

Attention: Roberto B. Tan

Treasurer of the Philippines

Gentlemen :

This refers to your letter dated March 8, 2010 requesting confirmation of the
tax treatment of the proposed issuance by the Republic of the Philippines (Republic)
of the 3-year and 5-year Fixed Rate Multi-Currency Retail Treasury Bonds for
Overseas Filipino Workers (OFWs) (hereafter referred to as "rTB for OFWs" or
"rTBs" for brevity). cHDAIS

It is represented that the Republic, represented by the Secretary of Finance, 1(1)

with the approval of the President, intends to issue the rTB for OFWs to raise funds
for the National Government to meet public expenditures authorized by law and to
provide local and overseas Filipinos the opportunity to invest in Philippines
government securities. Specifically, this maiden offering of the rTB for OFWs will be
issued onshore simultaneously in two (2) tranches: (1) US Dollar Tranche; and (2)
European Union Euro Tranche. The indicative issue size for the US Dollar Tranche is
US$400 Million and the EUR Tranche is €75 Million with a minimum subscription
amount of US$100.00 and €100.00, respectively. The rTBs will mature three (3) and
five (5) years from issue date tentatively set for April 2010. Interest payments will be
made quarterly.

It is further represented that the rTBs will be offered only in the Philippines on
primary issue to qualified retail investors, domestic and resident foreign corporations
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 and foreign currency depositary units (FCDUs). To provide investment opportunities
to OFWs and other qualified retail investors, a certain portion of the issue will be
allocated for them. The qualified retail investors here refer to OFWs, migrant
Filipinos, their families and beneficiaries, trusts holding funds for and in their behalf
and such other individual investors as the Secretary of Finance may determine.

It is finally represented that in recognition of the immense contribution of

OFWs and migrant Filipinos to our economy, the Republic will assume the final
withholding taxes on the rTBs held by OFWs and other qualified retail investors. 2(2)
Thus, interest payments to them shall be net of any taxes. On the other hand, other
bondholders including FCDUs shall bear the final withholding tax on the rTBs, which
shall be deducted from the interest payments.

The salient features of the rTB for OFWs are as follows:

"3-year and 5-year Fixed Rate Multicurrency Retail Treasury Bonds for
Overseas Filipino Workers in US Dollar and Euro Denominations due 2013
and 2015 Principal Commercial Terms

Issuer: REPUBLIC OF THE PHILIPPINES

Selling Agents: Dealers who made a successful bid for both US Dollar
and Euro Tranches, with an aggregate minimum principal amount equivalent to
US$5,000,000.00 of the US Dollar Tranche or €1,000,000.00 of the 3-year and
5-year Fixed Rate Multicurrency Retail Treasury Bonds for Overseas Filipino
Workers (the "Bonds") TIaCcD

Dealers who wish to participate in the Auction must submit a duly

accomplished Accession Letter substantially in the form of Annex A.

Issue Currency and Amount: Target amount of the issue is equivalent to

US$500,000,000.00, broken down into the approximate amounts as follows:

(i) US Dollar Tranche — US$400,000,000.00

(ii) Euro Tranche — €75,000,000.00

The Issuer reserves the right to increase the overall size of the Issue.

Nature and Amount of Bid: Each Bid shall be unconditional. The

minimum Bid for each Tranche shall be:

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 US$ Tranche Euro Tranche

US$5,000,000.00 €1,000,000.00

and increments of:

US$ Tranche Euro Tranche

US$1,000,000.00 €1,000,000.00

Auction Date: 21 April 2010

Offer Period: 21-27 April 2010. Acceptance of subscriptions shall be on

a "first-come-first-serve" basis. When subscription has reached a level deemed
sufficient by the Issuer, the Issuer, through the BTr-SOD, shall announce the
termination and closure of the offer period through electronic financial
information providers chosen by BTr, such as Thomson Reuters, Bloomberg, or
any of its successors. The Issuer reserves the right to announce at any time, the
remaining volume available for sale on a particular day during the Offer Period."

Issue Date: 29 April 2010

ISIN/Series Code:

US$ 3-year: USDB0313D010

US$ 5-year: USDB0515D010

€ 3-year: EURB0313D018

€ 5-year: EURB0515D018

Form and Denomination: The Bonds shall be issued in scripless form

and will be sold during the public offer period in the following minimum
denominations and integral multiples thereof for each Tranche:

(i) US Dollar Tranche — US$100.00

(ii) Euro Tranche — €100.00

Maturity Date: 29 April 2013 and 29 April 2015 for the 3-year and
5-year Bonds, or if the Issue Date does not occur on 29 April 2010, the Maturity
Date shall be the date that is 3 and 5 years, respectively, following the Issue
Date.

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 Issue Price: At par (or 100%)

Redemption Price: At par (or 100%)

Interest Rate: The final interest rate for each Tranche shall be determined
through Dutch Auction to be participated in by Government Securities Eligible
Dealers ("GSEDs")

At about 11 am on Auction Date, the Issuer through BTr will issue a

pricing guidance which will indicate the maximum bid yield for each tenor for
both Tranches.

Interest Payment Date: Interest on the Bonds, to be calculated on a

30/360-day basis, will be paid quarterly in arrears on the last day of each
3-month Interest Period. The Bonds will cease to bear interest on the Maturity
Date. If the Interest Payment Date is not a Business Day, interest will be paid on
the next succeeding Business Day, without adjustment in the amount of interest
to be paid.

Selling and Transfer Restriction: The selling and transfer restrictions

shall be as provided in the Program Mechanics, this Notice of Offering and
applicable regulations of the BTr.

Pursuant to the Authority of the Secretary of Finance under RA 245, as

amended, the issuance of the Bonds to the Selling Agents, and the initial transfer
of the Bonds from the Selling Agents to the investors within thirty (30) Business
Days from Issue Date, is considered within the coverage of the Primary Market
and, accordingly, not covered by the rules on fees of any relevant Exchange.

Registry and Transaction Fees: Bondholders will be required to open and

maintain a sub-registry securities account for monitoring ownership and
settlement of transactions on the Bonds. A Bondholder shall be charged a
one-time account opening fee of P100.00; an annual account maintenance fee
equivalent to 0.0025% of the face value of the Bonds; tax tracking fees for every
transfer of the Bonds recorded in the name of the investor; and miscellaneous
fees for non-trade transfers, generation and delivery of written statements and
notices.

All fees associated with the opening and maintenance of sub-registry

securities account shall be for the account of the holder of the Bonds. ACETIa

The foregoing notwithstanding, Target Investors whose investment in

the Bonds qualify as retail shall be exempt from the account opening fee and
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 account maintenance fee.

Eligible Subscribers: Eligible Subscribers shall include:

(i) Target Retail Investors, i.e., (a) Overseas Filipino

Workers; (b) migrant Filipinos who have maintained or
re-acquired Philippine citizenship; (c) legitimate spouse of
either a or b; (d) children of either a or b; (e) parents of either a
or b; and (f) allotees of a;

(ii) Non-OFW Individuals;

(iii) Foreign Currency Depositary Units;

(iv) Corporates;

(v) Tax-exempt Institutions;

(vi) Trusts; and

(vii) Other investors as the Issuer may determine.

For this purpose, an Overseas Filipino Worker is one who has an

existing employment contract as an OFW or whose employment contract as an
OFW expired not more than one (1) year prior to the Issue Date or purchase
date.

For this purpose, an Overseas Filipino Worker is an individual citizen of

the Philippines who is working or deriving income from abroad by reason of
employment, or who has worked or derived income abroad by reason of
employment within the period that is one (1) year preceding the date of
subscription or purchase of the Bonds. Migrant Filipinos, on the other hand,
shall constitute non-resident Filipinos who have retained or reacquired
Philippine citizenship under Republic Act No. 9225.

GOCCs and LGUs may only purchase the Bonds directly from the Issuer
through over-the-counter facility of BTr.

An Application to Purchase shall be duly executed for subscription to the

Bonds substantially in the form of Annex B hereof.

Retail Investors: The term "Retail Investor" shall refer to: (i) Target
Retail Investors, (ii) Non-OFW Individuals, and (iii) trusts. CDHSac

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 Retail Sales Obligations: Each Selling Agent shall be required to sell to
Retail Investors (as defined above), at least 20% in aggregate US Dollar value of
its subscription in both US Dollar and Euro Tranches of the Bonds (as allocated
to it by the Issuer) at any time within a period commencing on the Issue Date up
to and including the date that is Thirty (30) Business Days from the Issue.

Selling Agency Fees: Dealers acting as Selling Agents shall be paid a

selling agency fee in accordance with the Notice of Offering. No Dealer shall
cede, pay, share, or compensate third-party investors or purchasers any selling
agency fees in exchange for the purchase of the Bonds. Any selling agency fee
due to Selling Agents shall be deducted from the proceeds of their Bonds sales
in accordance with the BTr's "Settlement Procedures for the RTB Public
Offering", attached as Annex B.

Taxation: The interest income earned by the investors on the Bonds shall
be subject to the prevailing withholding tax, except as otherwise prescribed for
Target Retail Investors.

Documentary stamp tax (DST) on original issue of the Bonds shall also
be for the account of the Issuer.

The Issuer shall assume and pay for the final withholding tax on the
interest income earned from the Bonds by Target Investors, provided the
following eligibility requirements among others are complied with to the
satisfaction of the Issuer at the time of subscription to or purchase of the Bonds:

(a) For an OFW

i. He must be a Filipino citizen registered with the

POEA or OWWA as an OFW with a valid Overseas
Employment Certificate number;

ii. He has a valid and existing overseas employment

contract at the time of subscription or purchase of the Bonds,
or if the contract has already expired, the same should have
expired not more than one (1) year from the subscription or
purchase date;

(b) For a Migrant Filipino —

i. He is a non-resident Filipino who retained or

reacquired Filipino citizenship; SIaHDA

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 ii. He submits his Philippine passport showing that
he is a resident of another country or his Bureau of
Immigration ID showing he reacquired Filipino citizenship;

iii. He submits a copy of his income tax return duly

filed in the country where he now takes residence;

(c) For the legitimate spouse, children, parents of OFW and Migrant
Filipino and Allottees of OFWs —

i. He must show compliance of his OFW or Migrant

Filipino spouse, child, parent or the OFW who made the
allotment with the requirements under 12.3 (a) above;

ii. He must submit acceptable proof or relationship

with the OFW or Migrant Filipino (e.g., marriage contract,
birth certificate, Philippine passport or Immigration
certification, appointment as Allottee) at the time of
subscription or purchase of the Bonds;

In addition to the foregoing, each Target Investor shall submit a duly

accomplished Application to Purchase setting forth the information required
therein.

The Issuer shall be deemed to have been granted the authority to verify
the truthfulness and accuracy of the information and documents supplied by a
Target Investor. If at any time it turns out that the Target Investor did not satisfy
the requirements set forth herein, the Target Investor shall not be entitled to
avail of the tax incentive.

Status: The Bonds shall constitute direct, unconditional, unsubordinated,

and general obligations of the Issuer and shall at all times rank pari passu and
without any preference among themselves.

Sinking Fund: The Issuer shall set up and maintain a sinking fund with
the BTr in order to accumulate the amounts necessary to pay the principal of the
Bonds on the Maturity Date.

Eligibility: The Bonds shall qualify in the same manner as all other
treasury notes and bonds in respect of (i) insurance reserves under the rules and
regulations of the Insurance Commission, (ii) performance and judicial bonds,
and (iii) permitted foreign currency cover for FCDU liabilities DEICaA

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 Settlement Procedures: Settlement shall follow the procedure prescribed
in the Settlement Procedures for the Multicurrency RTB Public Offering shown
as Annex D hereof.

Based on the foregoing representations, you now request for confirmation of

the following:

1. That the quarterly interest income to be derived from the rTB shall
be subject to Final Withholding Tax ("FWT") at the following
rates:

a. 20% FWT on interest income to be paid to qualified

individual buyers under Section 24 (B) (1) of the 1997 Tax
Code, as amended ("Tax Code");

b. 20% FWT on interest income to be paid to buyers that are

domestic corporations and resident foreign corporations
under Section 27 (D) (1) and Section 28 (A) (7) (a) of the
Tax Code; and

c. 10% FWT on interest income to be paid to FCDU buyers

under Sections 27 (D) (3) and 28 (A) (7) (b) of the Tax
Code;

2. That the interest income from the rTB to be derived by FCDUs

shall be subject to the Gross Receipts Tax ("GRT") at the rate of
5% under Section 121 (a) of the Tax Code;

3. That the issuance of the rTB shall be subject to Documentary

Stamp Tax (DST) imposed under Section 179 of the Tax Code; and

4. That the proposed assumption by the Republic of the FWT due on

the rTBs held by qualified retail investors (e.g., OFWs) is not
contrary to law. DCSTAH

We reply as follows:

1. Final Withholding Tax

Section 22 (Y) of the Tax Code defines a deposit substitute as follows:

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 "The term "deposit substitutes" *(3) (Y) The term 'deposit substitutes'
shall mean 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 borrower's 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. These
instruments may include, but need not be limited to, bankers' 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 inter-bank 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."

Notwithstanding the above definition, this Office has already ruled that the
mere issuance of government debt instruments and securities falls within the coverage
of "deposit substitutes" irrespective of the number of lenders at the time of
origination. 3(4) Thus, considering that the rTB for OFWs shall be issued by the
Republic, the rTB is classified as a deposit substitute and therefore, interest income
derived therefrom shall be subject to the following taxes:

a. 20% FWT imposed under Section 24 (B) (1) of the Tax Code, if
the buyer (or bondholder) is an individual citizen, e.g., OFWs, their
families and beneficiaries;

b. 20% FWT imposed under Sections 27 (D) (1) and 28 (A) (7) (a), of
the same Tax Code, for domestic and resident foreign corporations,
respectively; and

c. 10% FWT imposed under Sections 27 (D) (3) and 28 (A) (7) (b) of
the Tax Code if the buyer is an FCDU.

It bears notice that the final tax on that interest income shall be withheld at
source at the time the coupon payments are made, i.e., on a quarterly basis.

Furthermore, any gain that may be derived on the secondary trading of rTBs
shall be subject to income tax pursuant to the provisions of Sections 24 (A), 25 (A)
(1), 27 (A) and 28 (A) of the same Tax Code if the holder-investor is an individual
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 citizen, non-resident alien, domestic corporation, and resident foreign corporation,
respectively. In case the holder of said Bond is a non-resident individual whose
country/state has tax treaty with the Philippines, the applicable tax treaty provision
shall apply.

2. Gross Receipts Tax

Section 121 of the Tax Code of 1997, as amended by R.A. No. 9337, provides
that —

"SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries

Performing Quasi-Banking Functions. — There shall be collected a tax on gross
receipts derived from sources within the Philippines by all banks and non-bank
financial intermediaries in accordance with the following schedule: SIaHTD

"(a) On interest, commissions and discounts from

lending activities as well as income from financial leasing, on
the basis of remaining maturities of instruments from which
such receipts are derived:

"Maturity period is five years or less — 5%

"Maturity period is more than five years — 1%

"(b) On dividends and equity shares and net income of

subsidiaries — 0%

"(c) On royalties, rentals of property, real or personal,

profits, from exchange and all other items treated as gross
income under Section 32 of this Code — 7%

"(d) On net trading gains within the taxable year on

foreign currency, debt securities, derivatives, and other similar
financial instruments — 7%

It is clear from the above provisions that the gross receipts are classified into
four (4) categories, i.e., (a) interest, commissions and discounts from lending activities
and income from financial leasing; (b) dividends and equity shares; (c) royalties,
rentals and all other items treated as gross income; and (d) net trading gains, with each
category having its own applicable tax rate.

Applying the foregoing, the interest earned by FCDUs from the rTBs shall be
subject to gross receipts tax of 5% since the interest is derived from a lending activity,
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 i.e., the purchase of a bond issued by the Republic. On the other hand, net trading
gains derived on secondary trading of rTBs are subject to gross receipts tax of 7%.

3. Documentary Stamp Tax

Section 179 of the Tax Code reads:

"SEC. 179. Stamp Tax on All Debt Instruments. — On every original

issue of debt instruments, there shall be collected a documentary stamp tax of
One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof,
of the issue price of any such debt instrument: Provided, That for such debt
instruments with terms of less than one (1) year, the documentary stamp tax to
be collected shall be of a proportional amount in accordance with the ration of
its term in number of days to three hundred sixty-five (365) days: Provided,
further, That only one documentary stamp tax shall be imposed on either loan
agreement, or promissory notes issued to secure such loan. CHIaTc

For purposes of this section, the term debt instrument shall mean
instruments representing borrowing and lending transactions including but not
limited to debentures, certificates of indebtedness, due bills, bonds, loan
agreements, including those signed abroad wherein the object of contract is
located or used in the Philippines, instruments and securities issued by the
government or any of its instrumentalities, deposit substitute debt instruments,
certificates or other evidences of deposits that are either drawing interest
significantly higher than the regular savings deposit, taking into consideration
the size of the deposit and the risks involved or drawing interest and having a
specific maturity date, orders for payment of any sum of money otherwise than
at sight or on demand, promissory notes, whether negotiable or non-negotiable,
except bank notes issued for circulation."

Thus, rTBs to be issued by the Republic are subject to DST pursuant to the
aforequoted provision. The payment of the DST shall be made within five (5) days
from the close of the month when the taxable document was made, signed, issued,
accepted or transferred. 4(5) However, the transfer of rTBs in the secondary market by
way of simple delivery to the buyer is not subject to DST, unless the transfer carries
with it a renewal and issuance of new treasury notes in the name of the transferee to
replace the old ones. Hence, for this reason the secondary trading of rTBs in the name
of the transferee will no longer be subject to DST.

4. Assumption of Tax

Finally, we confirm your opinion that the proposed assumption by the

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 Republic, through the Bureau of Treasury, of FWT due on interest income from the
rTBs to be paid to qualified retail investors is not contrary to law. The tax assumption
scheme in respect of government bonds was in fact recognized by this Office in BIR
Ruling DA 050-07 dated January 31, 2007 where this Office explained the
consequence of a tax assumption scheme in this manner:

"The government's guaranty to pay the interest free of any tax entitles the
holder or investor of the instrument to receive the agreed interest without any
deduction for the tax required to be withheld by the government on deposit
substitute. It does not mean, however, that the interest income in itself is exempt
from tax. As there is no law or regulation providing for the tax exemption of
interest income derived from any government bond or instrument, be it issued in
peso or in foreign currency, the tax required to be withheld and remitted to the
government is still due and payable to the BIR but to be borne by the
government.

Thus, notwithstanding the presence of a tax exemption clause in the

ROP Global Bonds, the interest payments are still subject to the applicable
income and withholding taxes, but the tax is borne by the issuer (ROP) and not
deducted from the agreed amount of interest payable to the holder of the bond.
(Taxation of Financial Institution in the Philippines by Baladad)" LLphil

The proposed tax assumption in the instant case does not purport to make the
rTB for OFWs a tax-exempt instrument but simply shifts the burden of the tax from
the qualified retail investors (e.g., OFWs) to the Republic. This Office is not aware of
any law prohibiting a party from entering into an agreement to assume the burden of
the tax that may be assessed against the other contracting party, provided that the
agency assuming said tax is acting within the authority and mandate by law granted to
it, and that such authority includes the assumption of taxes due on particular
transactions.

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then
this ruling shall be considered null and void.

Very truly yours,

(SGD.) GREGORIO V. CABANTAC

Deputy Commissioner
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 Legal and Inspection Group
Bureau of Internal Revenue
Footnotes
1. Pursuant to Republic Act 245, as amended, the Secretary of Finance is authorized to
borrow to meet public expenditures authorized by law and to prescribe the financial
terms of any debt instruments, including bonds to be issued for the purpose.
2. See Principal Commercial Terms on Taxation, in relation to Item 8 (d) of the Program
Mechanics of the Issuance of the Multicurrency Retail Treasury bonds.
3. BIR Ruling DA-022-06A dated February 1, 2006 citing BIR Ruling No. 007-04 dated
July 16, 2004.
4. Section 5, Revenue Regulations No. 6-2001 dated July 31, 2001.

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 Endnotes

1 (Popup - Popup)
1. Pursuant to Republic Act 245, as amended, the Secretary of Finance is authorized to
borrow to meet public expenditures authorized by law and to prescribe the financial
terms of any debt instruments, including bonds to be issued for the purpose.

2 (Popup - Popup)
2. See Principal Commercial Terms on Taxation, in relation to Item 8 (d) of the Program
Mechanics of the Issuance of the Multicurrency Retail Treasury bonds.

3 (Popup - Popup)
* Note from the Publisher: Copied verbatim in the official copy.

4 (Popup - Popup)
3. BIR Ruling DA-022-06A dated February 1, 2006 citing BIR Ruling No. 007-04 dated
July 16, 2004.

5 (Popup - Popup)
4. Section 5, Revenue Regulations No. 6-2001 dated July 31, 2001.

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