REVENUE REGULATIONS NO. 1-2008 issued on February 5, 2008 amends certain provisions of Revenue Regulations (RR) No. 10-2006 by prescribing the procedures to govern the registration of Master Securities Lending Agreement (MSLA) and providing the guidelines for the execution and registration of multilateral MSLAs during the transition period of the Securities Borrowing and Lending (SBL) Program. For purposes of these Regulations, SBL shall be limited to borrowing and lending of shares of stock or securities listed in the Philippine Stock Exchange (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. SBL involves the lending of shares of stocks or securities by the Lender, who owns or controls them, to the Borrower who needs the shares of stocks/securities borrowed to support trading strategies or settlement obligations, in exchange for a collateral and the promise to return the equivalent shares of stocks/securities at the end of the borrowing period. The borrowing period in any agreement cannot be more than two (2) years. For purposes of these Regulations, the SBL transactions of shares of stock/securities listed in the PSE, as well as the delivery to and return by the Lender/Lending Agent of collateral appurtenant thereto or the Equivalent Shares of Stock/Securities, shall not be subject to the stock transaction tax unde r Section 127 or Capital Gains Tax imposed under Section 24(C), 25(A)(3), 28(A)(7)(c) and 28(B)(5)(c) of the Tax Code, and Documentary Stamp Taxes under Section 176 and Section 199(c) of the National Internal Revenue Code (NIRC), as amended by Republic Act 9243; provided, that, a valid MSLA is executed by the parties and registered with and approved by the 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 shall be treated as 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 stock/securities by the Borrower and negotiating the terms of an SBL, the parties must have entered into an MSLA or Multilateral MSLA. A valid MSLA or Multilateral MSLA contains 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. 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 recall/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. The Borrower may return the borrowed shares/ securities or the Equivalent Shares of Stock/Securities pursuant to Section 18 of SEC Memorandum Circular No. 7 (2006). 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, which 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 two (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. Concomitantly, the Lender is required to return the collateral put up by the Borrower. f. Specified purpose(s) – The purpose or pur poses 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: i. Settlement of sale of Philippine shares of stock/securities effected in the Philippines – Shares of stock/securities may be borrowed to avoid failure to deliver for the settlement of a sale. This happens when the seller cannot deliver what he owns on time (failed settlement) and therefore would need to borrow in order to fulfill his settlement obligations. The corresponding transaction taxes relative to the sale of shares/securities shall apply to the actual sale of shares/securities. ii. Settlement of a future sale whether agreed or not at the time the borrowing is effected – Shares of stock/securities may be borrowed in advance of a sale if it is anticipated that the borrowed shares of stock/securities will be required for settlement of the said future sale. The corresponding transaction taxes relative to the sale of shares of stock shall apply to the actual sale of shares/securities. iii. Replacement in whole or in part of shares of stock/securities obtained by the Borrower under another SBL agreement – Where a Lender demands the early return of borrowed shares of stock/securities, a Borrower without a sufficient quantity on hand of the shares of stock/securities demanded to be returned can borrow Equivalent Shares of Stock/Securities from a third party to repay the first Lender. The replacement borrowing may be for the whole, or part only, of the previously borrowed shares of stock/securities. A condition applying to such an arrangement is that the initial borrowing must itself be an SBL within the meaning of these Regulations. Moreover, the second borrowing must also be under an SBL governed by these Regulations. iv. On-lending of borrowed shares of stock/securities to another Borrower who has effected another SBL agreement- This occurs when an SBL is made by an Agent for on-lending to another Borrower who also effects an SBL. However, the subsequent Borrower must use the Borrowed shares of stock/ securities for any of the purposes specified herein. Because of the practical difficulties an intermediary could face in determining how the subsequent Borrower had used the shares of stock/securities, the BIR shall look at an intermediary’s borrowings and on-lendings separately. Thus, provided an intermediary borrows for the purpose of on-lending, his borrowing transaction will qualify under a conditional tax-free status. Furthermore, as shares of stock/securities carrying the same rights are fungible, it is not necessary to match each of an intermediary’s SBL with each of his on-lendings on a case-bycase basis. v. Securities financing and collateral pledging – Shares of stocks/ securities may be used by the Borrower as collateral for obtaining loans. The borrowed shares of stock may, in turn, be used by the Borrower as a commodity to lend to participants in securities market so that the participants can carry out their investments and financing efforts. vi. Other authorized purposes- Other purposes similar or analogous to the foregoing, or consistent with the objectives of the SBL program as may be determined by the BIR upon favorable recommendation of the SEC and the PSE. The following guidelines 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 the 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 and SEC, 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/Lending Agent or by their duly authorized agents must be registered with the BIR upon payment of the prescribed registration fee. Only the Borrower or the Lending Agent is required to register the MSLA to avoid duplication. d. As a general rule, an MSLA should be entered into by the Borrower for every Lender/Lending Agent. However, in view of the administrative difficulty of executing and registering an MSLA for every borrower, a Multilateral MSLA may be executed and submitted to the BIR by the Lender/Lending Agent or the concerned party with multiple borrowers. This means that instead of executing separate MSLAs for each borrower, the Lender/Lending Agent or the concerned party may execute and register with the BIR a Multilateral MSLA reflecting their undertaking and willingness to be bound by its provisions. It is understood that a Multilateral MSLA shall contain all the features of a valid MSLA, including the delivery of collateral. e. Where an MSLA does not comply with the requirements, 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 extension of the addendum will be eligible for a conditional tax-free status. The guidelines on the registration of every MSLA or Multilateral MSLA are specified in the Regulations. Only SBL transactions under an MSLA or Multilateral MSLA duly registered and approved by the BIR shall be entitled to the conditional tax-free status of the said transactions. Failure to register the MSLA or Multilateral 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. In order not to be assessed the corresponding taxes on the transaction, a Lender/Lending Agent should advise the BIR in writing that it 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 in the MSLA Registration Form. Said notification shall be submitted upon the registration of the MSLA by the Borrower. 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 mentioned above; 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; provided, that the Lender/Lending Agent may purchase Equivalent Shares of Stock/Securities using the collateral of the borrower from the stock exchange, which purchase is subject to the Stock Transaction Tax of the NIRC of 1997, as amended; 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. The Borrower is required to comply with the following requirements for record keeping and reporting: 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 that ledger; c. Prepare and keep an SBL Transaction Report for each specific SBL transaction in accordance with the form attached in the Regulations or substantially equivalent form; and d. Provide BIR copies of the SBL Transaction Report and the accompanying SBL Confirmation Notice. Provided, that where a Lending Agent is engaged by the parties for the SBL transactions, the Lending Agent shall be the one to provide the BIR with summary reports of outstanding and liquidated SBL transactions as required in Section 12(c) of RR No. 10-2006.