RR No. 10-2006: Prescribes the guidelines and conditions for the tax treatment of securities borrowing and lending transactions involving shares of stocks or securities listed in the Philippine Stock Exchange

Key points

1. Tax relief and conditions. SBL transactions and the delivery of collateral are not subject to Stock Transaction Tax, Capital Gains Tax or Documentary Stamp Tax. This requires a valid Master Securities Lending Agreement (MSLA) registered with and approved by the BIR, and an SBL Program that follows SEC rules and is administered and supervised by the PSE. All other applicable taxes continue to apply.
2. Features of a valid MSLA. The lender keeps rights such as manufactured dividends or benefits, which are not taxable income to the lender and not deductible for the borrower. The MSLA must also provide for stock return, collateral, a borrowing period of no more than 2 years from execution of the SBL Confirmation Notice, return of stock and collateral, and limited specified purposes.
3. Registration. The borrower registers the MSLA with the Law Division of the BIR National Office before the first SBL transaction, with the prescribed registration fee of P 5,000.00. The BIR returns the borrower’s copy with its approval or denial within 10 working days, and the lender must file a Notification of Execution of MSLA.
4. Deemed sale and its taxes. An SBL is treated as a sale and purchase in cases such as no stock return, use for other than specified purposes, default, a defective MSLA, no registration or late registration, or transactions outside the borrowing period. The sale is then subject to Capital Gains Tax, with BIR Form No. 1707 filed within 30 days of each sale, and to Documentary Stamp Tax. The gain is exempt from regular Income Tax and the tax paid is not deductible.
5. Records and reports. The borrower keeps SBL ledgers and an SBL Transaction Report for each transaction, and gives the BIR copies of the report and the SBL Confirmation Notice. Summary reports every 6 months are filed with the Law Division within 1 month after the covered period.
6. Penalties. A 25% surcharge applies for failure to file or pay as required, and 50% for willful neglect or a false or fraudulent return. Interest is 20% per annum on unpaid tax, and failure to file an information return or keep records carries P 1,000 per failure, up to P 25,000 in a calendar year.

Who is affected

• Borrowers and lenders of PSE-listed shares of stock or securities under an SBL Program

Deadlines and effectivity

• Borrowing period: no more than 2 years from the SBL Confirmation Notice
• MSLA registration: within 2 weeks if executed in the Philippines, within 1 month if executed outside
• BIR action on registration: within 10 working days from receipt
• Summary reports: every 6 months, filed within 1 month after the period