RR No. 5-2007: Prescribes the guidelines and conditions for the tax treatment of Securities Borrowing and Lending (SBL) or Securities Lending Transactions (SLTs) involving the Fixed-Income Securities Lending Program of the Philippine Dealing and Exchange Corporation (PDEx)

Key points

1. Scope limited to the PDEx program. The rules cover borrowing and lending of securities under the FISLP of PDEx, unless the SEC declares them ineligible. Securities handled by other Exchanges are covered by separate Regulations.
2. Tax relief when conditions are met. Borrowing and lending under the FISLP is not subject to Documentary Stamp Tax under Sec. 115 of the Tax Code. The delivery and return of collateral is not subject to Documentary Stamp Tax, Capital Gains Tax or Income Tax, provided a valid Master Securities Lending Agreement (MSLA) is registered with and approved by the BIR, SEC rules are followed, PDEx administers the Program, and the Regulations are complied with.
3. Valid MSLA must have set features. The MSLA must provide that the Lender keeps the income on the lent securities and the Borrower keeps the income on the collateral. It must also cover collateral valuation, a borrowing period of no more than one (1) year from the SLT Confirmation Notice, return of securities and collateral, and specified purposes of the borrowing.
4. Registration of the MSLA and Participation Agreement. PDEx registers the MSLA with the BIR. Each Borrower and Lender registers a Participation Agreement (PA) with a P 5,000.00 fee per capacity, and the BIR returns it endorsed with approval or denial within 10 working days from receipt. Failure to register makes the transaction a sale or a deposit substitute.
5. Deposit substitute or sale treatment. A transaction is a deposit substitute if the securities are used for other than the specified purposes, the MSLA features are not met, the PA is not registered, or it involves regular banking unit transactions. It is a sale if there is no return of securities or collateral, there is an actual sale such as a short sale, MSLA features are not met, or the parties are not registered.
6. Records, reports and penalties. Borrowers and Lenders keep SBL/SLT ledgers and report transactions to the BIR. PDTC files a bi-annual summary report and an annual report of liquidated transactions within 1 month after the covered period. Unpaid or unfiled taxes carry a 25% surcharge, or 50% for willful neglect or fraud, plus interest at 20% per annum, and P 1,000 for each failure to file certain information returns, up to P 25,000 per calendar year.

Who is affected

• Borrowers and Lenders under the PDEx FISLP
• PDEx
• PDTC

Deadlines and effectivity

• Borrowing period: not more than 1 year from the SLT Confirmation Notice
• PA registration: within 2 weeks if executed in the Philippines, within 1 month if executed outside
• Bi-annual and annual reports: within 1 month after the covered period