REVENUE REGULATIONS NO. 10-2006 issued on July 17, 2006 prescribes the guidelines and conditions for the tax treatment of securities borrowing and lending (SBL) transactions involving shares of stocks or securities listed in the Philippine Stock Exchange (PSE) with the end view of institutionalizing the SBL facility in the Philippine capital market. For purposes of these Regulations, SBL shall be limited to borrowing and lending of shares of stock or securities listed in the PSE unless declared by the Securities and Exchange Commission (SEC) to be ineligible for borrowing and lending under an SBL Program. SBL Program for other securities listed and traded in other Exchanges shall be covered by a separate Regulation. The borrowing and lending transactions of shares of stock/securities listed in the PSE, as well as the delivery to the Lender of collateral appurtenant thereto shall not be subject to the Stock Transaction Tax or Capital Gains Tax and Documentary Stamp Tax under the Tax Code, provided, that a valid Master Securities Lending Agreement (MSLA) is executed by the parties and registered with and approved by the Bureau of Internal Revenue (BIR), the SBL Program is in accordance with the rules and regulations of the SEC, and such SBL Program is under the administration and supervision of the PSE. However, all other applicable taxes prescribed by the Tax Code and special laws shall continue to apply. Unless the terms and conditions of these Regulations are complied with, the borrowing (lending) of shares of stock/securities shall be treated as a disposal (an acquisition) by the Lender (Borrower) and the return of borrowed shares/securities an acquisition (disposal) by the Lender (Borrower), in which case, the applicable taxes on the transaction shall be imposed. Prior to the borrowing of shares of stocks/securities by the Borrower and negotiating the terms of an SBL, the parties must have entered into an MSLA. A valid MSLA must contain the following features: a. Entitlement of Lender to Certain Stock Rights/Interest – While there is transfer of the shares of stock/securities to the Borrower, the Lender retains certain rights accruing to the shares of stock/securities lent, such as the right to receive cash, stock dividends or interest which the Borrower is obliged to manufacture or reimburse to the Lender during the borrowing period. These cash, stock dividends or interest, which the Borrower is required to manufacture or reimburse to the Lender, are otherwise referred to as “Manufactured Dividends or Benefits”. The Lender may likewise retain voting rights over the loaned shares of stock/securities while in the possession of the Borrower, if mutually agreed upon by the parties in the MSLA. Receipt of the Manufactured Dividends or Benefits shall not be a taxable income of the Lender since it just represents dividends/other benefits that the lender would have received had the share not been loaned pursuant to SBL. However, the payment of such amount by the Borrower shall not be a tax-deductible expense. On the other hand, the receipt of cash dividend from the issuing company by the Borrower or Buyer shall be subject to the provisions of existing laws. b. Stock return. – The Lender is entitled to recall the loaned shares of stock/securities in whole or in part. Upon demand or at the end of the borrowing period, the Borrower has the corresponding obligation to return the equivalent shares of stock/securities, i.e., equivalent number of the same class or type of shares of stock/securities carrying the same rights, and issued by the same company as that of the borrowed shares of stock/securities. c. Collateral requirement. – There is no consideration involved in the same manner as a regular buy and sell transaction. Instead, the Borrower merely puts up a collateral in accordance with the rules prescribed by the SEC and/or PSE in order to guarantee his obligations under the MSLA. The collateral may not be necessarily in the form of cash but may also be in the form of government or equity securities or letters of credit. d. Borrowing period. – The period agreed upon by the parties during which the specific SBL transaction under the MSLA is made effective and upon the termination of which, the specific SBL transaction is likewise ended. However, this period shall in no case exceed 2 years from the date of execution of SBL Confirmation Notice. e. Stock and collateral return. – Upon the expiration of the Borrowing Period, the Borrower is bound to return the equivalent shares/securities. The Lender is required to return the collateral put up by the Borrower. f. Specified purpose(s). – The purpose(s) for which the borrowed shares of stock/securities will be used are specified in and accordingly limited by the MSLA, which must be any of the following: 1. Settlement of sale of Philippine shares of stock/securities effected in the Philippines; 2. Settlement of a future sale whether agreed or not at the time the borrowing is effected; 3. Replacement in whole or in part of shares of stock/securities obtained by the Borrower under another SBL agreement; 4. On-lending of borrowed shares of stock/securities to another Borrower who has effected another SBL agreement; 5. Securities Financing and Collateral Pledging; and 6. Other authorized purposes. The following guidelines shall govern the execution of the MSLA: a. The Borrower must obtain the shares of stock/securities for one or more of the specified purposes as defined in these Regulations. In this regard, the MSLA may refer to the specified purposes within the meaning of these Regulations. However, an MSLA, which permits shares of stock/securities to be borrowed for the specified purposes as defined and some other purposes not defined or authorized by these Regulations shall not qualify as a valid MSLA. b. A single MSLA may provide for the borrowing and lending of more than one type of shares of stock/securities. However, only shares of stock/securities, the sale and purchase of which are subject to the rules of PSE, are eligible for SBL transaction. Shares of stock/securities in private companies not listed and traded through the PSE do not fall within the scope of an SBL transaction subject of these Regulations. c. Every MSLA entered into by a Borrower and a Lender or by their duly authorized agents must be registered with the Bureau upon payment of the prescribed registration fee pursuant to these Regulations. The Borrower for every Lender counterpart should enter into an MSLA. However, of the parties to the MSLA, only the Borrower is required to register the MSLA to avoid duplication. d. Where an MSLA does not comply with the requirements set forth, the BIR shall consider the requirements fulfilled if a copy of the MSLA is accompanied by an executed copy of an addendum duly complying with the deficiency requirement. In such cases, the addendum should be attached to a copy of the MSLA. Only transactions entered into subsequent to the execution of the addendum will be eligible for a conditional tax-free status. The following guidelines shall govern the registration of every MSLA: a. Prior to entering into the first SBL transaction, the Borrower must provide the BIR with the following: 1. 3 original or certified true copies of a duly completed MSLA Registration Form; 2. 3 original or certified true copies of the duly-notarized MSLA (and its addendum if applicable); 3. The prescribed registration fee of P 5,000.00; 4. 3 original or certified true copies of Lender’s Notification of Execution of MSLA; and 5. Other documents and information that the BIR may require. The Borrower’s copy of the MSLA and its addendum (if applicable), endorsed with a registration number and stamped to acknowledge payment of registration fee, will be returned to the Borrower endorsed with the approval or denial of the BIR, as the case may be, within 10 working days from receipt thereof. b. The MSLA shall be registered at the Law Division of the BIR National Office or in such other office, which the Commissioner may hereafter direct, upon filing of Registration Form and payment of the registration fee with the General Services Division (GSD) at the BIR National Office. Registration of the MSLA should be made within 2 weeks if executed in the Philippines and within 1 month if executed outside the Philippines. In case parties have valid existing MSLAs executed outside the Philippines prior to the effectivity of these Regulations, the borrower must register the MSLA before entering into the first SBL transaction involving Philippine equity securities. c. Only SBL transactions under an MSLA duly registered and approved by the BIR shall be entitled to the conditional tax-free status of the said transactions. d. Failure to register the MSLA will make the SBL transaction a sale and purchase of the borrowed shares of stock/securities outside the PSE thus, the SBL transaction shall be subject to the corresponding Capital Gains Tax and Documentary Stamp Tax. e. A Lender under an MSLA must take reasonable care to ensure that the Borrower registers the MSLA or is aware of the requirement to register the MSLA as soon as possible. Due notice to the borrower may be effected, for example, by stipulating in the MSLA or in the addendum (if applicable) that the Borrower shall register the agreement and its addendum with the BIR or by otherwise informing the Borrower of such registration requirement. In order not to be assessed the corresponding taxes on the transaction, a Lender must also advise the Bureau in writing that he has entered into an MSLA by filling in the Notification of Execution of MSLA Form. The advice should include particulars of the agreement similar to those shown on the MSLA Registration Form. Said notification shall be submitted upon the registration of the MSLA by the Borrower. f. It shall be the duty of the Law Division of the BIR National Office to determine whether the registered MSLA conforms to the requirements herein imposed, to recommend the signature of the Commissioner or his duly-authorized representative for the approval or denial of the MSLA registration, to monitor compliance of the parties to the conditions herein prescribed and to recommend, where appropriate, assessment of the taxes against the parties found to have entered into an SBL transaction in violation of these Regulations. An SBL is deemed a sale and purchase of the borrowed shares of stock/securities (or part of it, as the case may be) when any of the following circumstances is present: a. There is no stock return in whole or in part of the borrowed shares of stock/securities at the end of the borrowing period. A partial stock return is permissible; however, the balance of any borrowed shares of stock/securities that has not been returned at the end of the borrowing period is deemed to have been bought (sold) by the Borrower (Lender); b. The borrowed shares of stock/securities, or part of it, have been used other than that for the specified purposes enumerated in the Regulation; c. The borrower is in default in accordance with the terms provided for in the MSLA for the return of the whole or part of the borrowed shares of stock/securities; d. There is failure to comply with the essential features of a valid MSLA; e. There is failure to register or there is delayed registration of the MSLA; or f. SBL transactions were entered into by the parties outside the borrowing period. Where an SBL is deemed a sale and purchase of the borrowed shares of stock/securities (either in whole or in part), as determined by the BIR and upon due notice to the parties concerned, such transaction shall be subject to applicable taxes as if a sale and purchase of those shares of stock/securities had been effected in the Philippines. In such a case, the following shall be the tax consequences: a. If the purported SBL transaction is deemed a sale, such sale is necessarily consummated outside the PSE. Hence, the transaction shall be subject to Capital Gains Tax and shall be subject to the following rules: i. The Net Capital Gains Tax shall accrue within 30 days following each sale or other disposition of shares of stock, upon the filing in duplicate of a Capital Gains Tax Return (BIR Form No. 1707) with the Authorized Agent Banks (AAB) located within the Revenue District Office (RDO) having jurisdiction over the residence or principal place of business of the deemed seller showing, among others, the name of seller and buyer; amount realized (selling price or fair market value of other property received) and contract price or closing price of the securities sold on the day preceding the specified day as defined in the Regulation; cost or adjusted basis; date of acquisition; sale or disposition. ii. A final consolidated return or an adjustment return covering all stock transactions during the taxable year shall be filed on or before the 15th day of the 4th month following the close of the taxable year. iii. The said return shall include all stock transactions resulting in Capital Gains or capital losses for the whole year. The tax shown on the final or adjustment return after deducting therefrom the taxes paid during the taxable year shall be paid upon filing or refunded, as the case may be. iv. The tax base shall be determined on a consideration based on the closing price of the shares of stock on the day preceding the specified day as defined in the Regulation or the actual amount realized, whichever is higher, less the carrying cost or adjusted basis of the sold securities, for Capital Gains Tax, and without any deduction, for the computation of the Documentary Stamp Tax. The closing price should be determined in accordance with the Rules and practices of the PSE. b. The deemed sale transaction as stated shall likewise be subject to the Documentary Stamp Tax; c. Any gain derived from the transaction deemed sale as provided in the Regulation shall be exempt from the regular individual or corporate Income Tax. The tax paid thereon shall not be deductible for Income Tax purposes; and d. The deemed sale and purchase transaction may expose the Borrower to penalty for late payment of Documentary Stamp Tax and Capital Gains Tax if the applicable time limits set out in the Tax Code of 1997 are not complied with. In terms of record keeping and reporting, the Borrower is required to comply with the following: a. Keep SBL ledgers and other books of account in the form prescribed by the Commissioner of Internal Revenue; b. Enter required particulars of SBL transactions and Stock Return into the ledger; c. Prepare and keep an SBL Transaction Report for each specific SBL transaction in accordance with Appendix C of the Regulations or substantially equivalent form; and d. Provide the BIR copies of the SBL Transaction Report and the accompanying SBL Confirmation Notice. The SBL ledgers shall be kept in a written form, as per sample format in Appendix D of the Regulations, or recorded on a computer where the relevant information can be supplied in a legible hard copy format. The ledger shall contain the following particulars with respect to each SBL transaction and related Stock Return: a. Date of borrowing or lending and date of return; b. Name of Borrower and Lender; c. Reference numbers to identify the SBL transaction, the Stock Return and the MSLA; d. Description of the shares of stock/securities borrowed or loaned (name, code and type); e. Quantity of the shares of stock/securities borrowed or loaned (number of shares and value); f. Purpose for which the shares of stock/securities were borrowed; and g. Form of collateral, value and other pertinent information about the collateral. Bi-annual summary reports of outstanding and liquidated SBL Transactions and Stock Returns must be prepared every 6 months and filed with the Law Division of the BIR National Office within 1 month after the end of the covered period. The said reports must be accompanied by copies of the SBL Transactions Report and SBL Confirmation Notice evidencing specific SBL transactions entered into by the parties during the 6 month period. In addition to the tax required to be paid, a surcharge equivalent to 25% of the amount due shall be imposed in case of any failure to make and file a return and pay the tax due thereon as required by these Regulations on the date prescribed; or unless otherwise authorized by the Commissioner, filing a return with an Internal Revenue Officer other than those with whom the return is required to be filed; or failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of the Tax Code or of these Regulations, or full amount of the tax due for which no return is required to be filed on or before the date prescribed for its payment. In case of willful neglect to file the return within the period prescribed by the Code or these Regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be 50 % of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud. There shall be assessed and collected on any unpaid amount of tax, interest at the rate of 20% per annum, or such higher rate as may be prescribed by the rules and regulations, from the date prescribed for its payment until the full payment thereof. Any deficiency in the tax due shall be subjected to interest at the rate of 20% per annum, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof. In case of failure to pay the amount of the tax due on the return required to be filed, or a deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner of Internal Revenue, there shall be assessed and collected on the unpaid amount, interest at the rate of 20% per annum until the amount is fully paid, which interest shall form part of the tax. In case of each failure to file an information return, statement or list, or keep any record, or supply any information required by these Regulations on the date prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall upon notice and demand by the Commissioner, be paid by the person failing to file, keep or supply the same, P 1,000 for each such failure: Provided, however, that the aggregate amount to be imposed for all such failures during a calendar year shall not exceed P 25,000.