RMC No. 81-2024 — Tax Treatment of Sukuk (Islamic Bond) as Islamic Banking Arrangement Pursuant to the Tax Neutrality Provision of Republic Act No. 11439 (An Act Providing for the Regulation and Organization of Islamic Banks) as Implemented by Revenue Regulations No. 17-2020

BUREAU OF INTERNAL REVENUE REPUBLICOF THE PHILIPPINES DEPARTMENT OF FINANCE

Quezon City

Date: JUL 1 8 2024

REVENUE MEMORANDUMCIRCULAR NO.0 81-2 0 2 4

Subject: Tax Treatment of Sukuk Islamic Bond as Islamic Banking Arrangement Pursuant to the Tax Neutrality Provision of Republic Act No.11439(An Act Providing for the Regulations No. 17-2020. Regulation and Organization of Islamic Banks as Implemented by Revenue

To: All Banks.Including Islamic Banks and Islamic Banking Units of Conventional Banks Non-Bank Financial Intermediaries, Internal Revenue Officers/Employees and Others

Concerned

Background

conventional or Islamic finance arrangement, to boost economic growth. The government is committed to undertake various reforms in the capital market, specifically to broaden and deepen the market for both government and private debt instruments,either

Sukuk are one of the most significant mechanisms for raising finance in the capital markets corporations and financial institutions use Sukuk issuance as an alternative to syndicated through Islamically acceptable structures.Multinational corporations,sovereign bodies,state financing or to bond issuance.

Sukuk are an interest-free bonds that generate returns to investors without infringing the Shari ah-compliant securities backed by a specific pool of underlying assets. In most practical applications of Sukuk, the cash flows that investors see is very similar to what they would see principles of Shari'ah (Islamic law which prohibits the payment of interest (riba.They are compliant projects or activities. when investing in bonds,making Sukuk a suitable alternative for bonds in financing Shari'ah

provision of Section 14 of RA No.11439 as implemented by Revenue Regulations (RR No. This Circular is being issued to provide the tax treatment of Sukuk pursuant to the tax neutrality 17-2020 for the guidance and observance of all concerned.

Guidelines

1.RR No.17-2020 requires that Islamic banking transactions are taxed no more heavily and shall apply to gains or profits received and expenses incurred in Islamic banking no more lightlythan conventional banking transactions.Thus.any reference to interest arrangements, in lieu of interest income and/or expenses under the conventional banking transactions.

2.Sukuk are defined by Bangko Sentral ng Pilipinas BSP as certificates of equal value representing undivided shares in ownership of tangible assets,usufructs and services or (in the ownership of assets of particular projects or special investment activity that is undertaken in accordance with Shari'ah principles. Sukuk are generally named after the Shari'ah principle by which they are structured."

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The structure of Sukuk involves the following entities and their roles:

a) Originator -the entity or entities that wish to raise funds through the issuance of Sukuk.This could be a government,a corporation,a financial institution or another legal entity with financing needs.

bIssuer/Special Purpose VehicleSPV-a separate legal entity established to issue the Sukuk. It holds the underlying assets or business activities related to the Sukuk and serves as the conduit through which investors can participate in the ownership of the underlying assets.

C Shariah Advisor-Also known as Shariah board is a panel of Islamic scholars or experts in Islamic finance who ensure that the Sukuk structure and the underlying the Sukuk to ensure compliance with Islamic law. assets comply with Shariah principles. They provide guidance on the structuring of

d Lead Manager/Arranger - typically a financial institution or investment bank underwriting the issuance. This party plays a key role in the origination and responsible for structuring the Sukuk issuance, coordinating the transaction, and execution of the Sukuk issuance.

e Trustee-a fiduciary appointed to represent the interests of the Sukuk holders.The trustee ensures that the rights of the Sukuk holders are protected and that the issuer complies with the terms and conditions of the Sukuk.

fInvestors -individuals, institutions, or entities that purchase the Sukuk certificates providing the funds needed by the issuer.

gUnderwriters - financial institutions or investment banks that commit to purchase that the entire issuance will be subscribed. any unsold portion of the Sukuk issuance, thereby providing assurance to the issuer

unsold portion of the issuance. Instead, the issuer and the lead arranger may facilitating the issuance, providing advisory services,and ensuring compliance structure the offering in a way that places the responsibility of selling the entire issuance on the issuer. In such cases, the underwriter's role may be limited to with regulatory requirements and market standards. On the other hand, underwriters may not always commit to purchasing the

h Obligor - the entity responsible for making the payments due on the Sukuk to the investors. This entity may be the originator's operating company, business, or the underlying assets themselves.

structure of the Sukuk issuance. The specific parties involved and their roles may vary depending on the type and

lead manager for the Sukuk issuance. However, this may raise potential conflicts of interest possible for one entity or individual to take on multiple roles in a Sukuk transaction. For and is less common in practice due to the need for independence and expertise in each role. example, a corporation could act as the originator,establish the SPV, and also act as the While these functions are typically performed by separate entities, it is theoretically

Note: In Sukuk structures,the obligor, originator and issuer can be the same entity, but they can also be different entities. The specific roles and relationships among these parties depend on the structure and terms of the Sukuk issuance. Here are the typical scenarios: BUREAU OF INTERNALREVENUE RECORDSMANAGEL NT DIVISION 2

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Same Entity:

payments to Sukuk holders, the originator (the entity that originates the issues the Sukuk are the same.This is a straightforward structure where a In many Sukuk structures, the obligor (the entity responsible for making single entity assumes all these roles. underlying assets or business activities, and the issuer (the entity that

Different Entities:

In some Sukuk structures, the roles are separated, and different entities perform each function:

0 Issuer: The entity that formally issues the Sukuk and represents the Sukuk holders. Obligor: The entity that undertakes the responsibility for making

Originator: The entity that originates the underlying assets or business activities that the Sukuk are linked to. payments to Sukuk holders.

The separation of these roles can be part of the structuring of Sukuk transactions to achieve specific objectives.For example,having a separate obligor from the originator or issuer might be a risk management strategy, stronger financial position. enhancing the creditworthiness of the Sukuk by involving a party with a

needs and preferences of the parties involved. It is important for investors and The flexibility in Sukuk structures allows for customization to meet the specific with a Sukuk issuance to understand the roles and relationships among the obligor originator, and issuer in that particular structure. stakeholders to carefully review the documents and legal agreements associated

3.Sukuk are based on one or more of 14 named Islamic contracts, though a smaller number are used in practice. They usually involve the use of a SPV which holds the assets on behalf of the investors and which is the formal issuer of the Sukuk. Sukuk structures are not standardized and the principal named contract is usually accompanied by a number of other contracts and undertakings.

Here are some commonly recognized Islamic contracts that may be employed in Sukuk Shariah framework for the issuance and trading of Sukuk. structures and other Islamic financial transactions. These contracts provide the legal and

6Istisna-a: Pre-delivery sale or manufacturing contract. 2) 8Kafalah:Guarantee or suretyship. 1Murabahah:Cost-plus financing. 3 5 9)Hawala: Transfer or remittance contract. 4 10Musawamah:Bargaining or general sales contract. 11Muzara'ah:Sharecropping or agricultural partnership 13Wadi'ah:Safekeeping or custody contract. 12Mudarabah Mutlaqah:Unrestricted Mudarabah. Musharakah: Joint venture or partnership Mudarabah: Profit and loss sharing partnership Al-IjarahLeasing or rental contract. Salam: Forward sale with advance payment. Wakalah:Agency contract.

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14SukukIslamic bonds.

4 All Banks,including Islamic Banks IBs/Islamic Banking Unit IBUs of Conventional

Banks and Non-Bank Financial Intermediaries (NBFIs shall classify and subsequently measure a Sukuk investment either at amortized cost, fair value through other comprehensive income, or fair value through profit or loss based on its business model for managing the investment; and the contractual cash flow characteristics of the Sukuk in accordance with Philippine Financial Reporting Standards (PFRS9,the following shall be followed:

Classification and Measurement: Determine the appropriate classification and measurement category for the Sukuk based on its contractual cash flow characteristics. PFRS 9 provides three categories: amortized cost, fair value through other comprehensive incomeFVOCI,and fair value through profit or loss FVPL

b.Initial Recognition Upon issuance of the Sukuk, recognize it initially at fair value which is typically the transaction price. If there are any transaction costs directly attributable to the issuance, they are generally deducted from the initial carrying amount.

c.Subsequent Measurement: Measure the Sukuk instrument based on its classification

For instruments classified at amortized cost, measure them at amortized cost using the effective profit method (effective interest rate method).

For instruments classified as FVOCI,measure them at fair value, with changes recognized in other comprehensive income.

For instruments classified as FVTPL,measure them at fair value,with changes recognized in profit or loss.

d.Impairment: Assess the Sukuk instrument for impairment based on the expected credit losses. Recognize a loss allowance for the expected credit losses if there is a significant increase in credit risk since initial recognition.

e DerecognitionDerecognize the Sukuk when it is redeemed,repurchased, or matures

or when the contractual rights to cash flows expire. The gain or loss on derecognition is generally recognized in profit or loss.

I Disclosures: Present the Sukuk instrument on the balance sheet in accordance with its

disclosures, including information about the nature, terms and extent of risks arising from financial instruments, as well as the accounting policies applied. classification. Additionally, ensure that the financial statements provide the required

Taxability

characteristics similar to bonds, are subject to the following taxes: Sukuk issued, structured in a Shari'ah-compliant manner, but with economic

1.Determination of Gain The gain or profit in Sukuk is determined based on the specific

structure and terms of the Sukuk issuance. It can be calculated through profit-sharing ratios. rental income,mark-up or price differentials, or the sale of underlying assets. The method of determining gain or profit depends on the contractual arrangements outlined in the Sukuk documentation.

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1.1 Gains or profits realized by Sukuk holders from Sukuk transactions with maturity of

less than five years are subject to 20% final withholding tax FWT).On the other hand those with maturity of five years or more are excluded from the gross income and are therefore exempt from income tax.

1.2 In the case of Sukuk pre-termination, entire gains or profits realized by Sukuk holders. are subiect to FWT with varying rates based on the remaining maturity thereof

Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20%

1.3 Gains or profits realized by Sukuk holders, from Sukuk transactions,who are non resident aliens not engaged in trade or business in the Philippines and non-resident foreign corporation are subject to twenty five percent 25%FWT;

2.The Sukuk issuer is required to withhold the tax at every payment of gains or profits and for purchases of asset either directly from a supplier or through an agent;

3. Gains or profits realized by Originator/Obligor,Arranger,Manager,and Underwriter from Sukuk transactions are subject to regular income tax and value-added tax VAT or percentage tax,whichever is applicable;

4 Gains or profits realized by the SPV are subject to regular income tax but exempt from

VAT;

5. Any disposal or lease of the underlying asset, and execution of any additional instrument required in a Sukuk transaction, for the purpose of compliance with Shari ah principles but which will not be required in a conventional bond transaction, shall be deemed excluded for taxation purposes;

6.A documentary stamp tax DST is imposed on all Sukuk instruments under Sections 176 and 179 of the National Internal Revenue Code of 1997,as amended,Tax Code unless excepted under Section 199(g) of the same code.

Sukuk Structures

is given the same name.In particular, while the obligor, accepting responsibility for the payments under the Sukuk and for buying back the assets at the end of the term, is normally the same as the originator, in some cases there is a separate obligor. As already indicated variations on these structures are possible even when the Sukuk

encountered in practice. The following sub-paragraphs give examples of some Sukuk structures that may be

1.Sukuk al-murabahah

(sometimes called tawarruq in which a commodity is bought and then Murabahah is basically the sale of goods at a price comprising the purchase practice,its use in Sukuk is normally in the form of commodity murabahah price plus a margin of profit agreed upon by both parties concerned. In

1 Section 24 (B)(1) of the Tax Code of 1997, as amended. 3 Section 25 (B) of the Tax Code of 1997.as amended 21bid BUREAU OFINTERNALREVENUE DRDSMANAGEMENT DIVISION

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terms. The principle of Murabahah, which is the cost-plus-profit arrangement. In this Sukuk, the issuer raises funds by selling certificates representing structure is commonly used for short-to-medium-term financing needs in immediately re-sold, with one of the transactions being on deferred payment the goods are then sold to the Sukuk issuer at a markup. The Sukuk holders, in turn, receive periodic returns based on the agreed-upon profit margin.The that align with Islamic finance principles. ownership in tangible assets acquired through a Murabahah transaction. The underlying transaction involves the purchase of goods at a disclosed cost, and various sectors, allowing both issuers and investors to engage in transactions

1.2 Figure 1:Transaction structure diagram of Sukuk al-murabahah

SPV/TRUSTEE/ISSUER

Stage 5.SPV sells the asset to the Originator on a Murabaha basis (immediate delivery and deferred payment) Stage 4.SPV buys the asset either directly or through delivery and payment) an agent (immediate INVESTORS

Stage 6.Originator pays periodic payments/bullet payment to SPV META

ORIGINATOR SUPPLIER

1.3 Tax Neutrality

2 3 Originator sets up the SPV (through the arranger A notice of request to purchase is sent to the SPV SPV issues Sukuk and collects proceeds Transactions No tax consequence. Sukuk instruments - subject to DST. No tax consequence. Tax Consequence

5. SPV buys the asset either directly or through an SPV sells the asset to the Originator on a by Originator agent (immediate delivery and payment) Subject to expanded withholding tax. No tax consequence.

6. Originator pays periodic payments/bullet payment deferred payment murabahah basis (immediate delivery and SPV is subject to regular income tax.VAT

1. SPV pays profit (coupons to SPV Subject to final withholding tax at the varying exempt.

rates:

a b. C: Exempt if maturity is 5 years or more 25% if Sukuk holders are non-resident 20% if maturity is less than 5 years aliens not engaged in trade or business in the Philippines or non-resident foreign corporation.

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d. In the case of certificate pre- termination -subject to FWT with varying rates.

2. Sukuk al-ijara.

2.1 assets from an originator to an SPV, which then issues to investors Sukuk Sukuk al-ijara involves the transfer of ownership or benefit/usufruct of tangible Sukuk at that time. Sukuk-al-ijara is an asset-based Sukuk which is certificates representing undivided ownership interests in such assets. The asset is then leased back to the originator by the SPV for a specified term,which is typically commensurate with the term of the certificates. Each Sukuk holder is entitled to receive the rentals generated under the lease pro rata to its ownership interest in the underlying asset. The amount of these rentals is equal to, and used by the SPV to pay,the periodic distribution amount payable under the economically similar to a conventional bond.

2.2 Figure 2: Transaction structure diagram of Sukuk-al-ijara

the G orice STAGE 6.SPV pays STAGE1.SPV collects proce issues Sukuk

A eds and

5 2 SPV/ISSUER /TRUSTEE STAGE8.Re c ption of ent

e ukuk

STAGE 4.SPV leases the asset to the Originator and appoints the latter as a service agent INVESTORS STAGE 5.Originator pays periodic rent to SPV

the asset back & pays the asset price to SPV STAGE 7.At maturity,the Originator buys

ORIGINATOR

2.3 Tax Neutrality

2 1 SPV issues Sukuk and collects proceeds Originator sells the asset to the SPV Transactions Sukuk instruments -subject to DST No tax consequence. Tax Consequence

3. 4: 5 Originator pays periodic rent to SPV Originator receives the asset price SPV leases the asset to the Originator and appoints the latter as a service agent No tax consequence. No tax consequence. SPV is subject to regular income tax.VAT

6. SPV pays rent coupons Subject to final withholding tax at the varying exempt.

rates: b a Exempt if maturity is 5 years or more 20% if maturity is less than 5 years

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8. : Redemption of Sukuk At maturity the Originator buys the asset back and pays the asset price to SPV No tax consequence. No tax consequence. d.In the case of certificate pre- C. 25% if Sukuk holders are non-resident aliens not engaged in trade or business in the Philippines or non-resident foreign corporation. termination-subject to FWTwith varying rates.

3.Sukuk al-musharakah

3. in pre-agreed ratios, while the loss is borne by every partner strictly in venture. All providers of capital are entitled to participate in management, but is not necessarily required to do so. The profit is distributed among the partners proportion to respective capital contributions. Musharakah means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business

3.2 A variant on this basic structure is the use of Sukuk-al-musharakah in issuances adverse trigger events. by Islamic banks which are intended to rank as regulatory capital.In these cases, the Sukuk are generally perpetual and convertible to equity under certain

3.3 Figure 3: Transaction structure diagram of sukuk al-musharakah

he 0oun mdoratt contractualindenendens Hy bem s e ORIGINATOR/ MANAGING SArn PARTNER soehed gatees Stage 4.Investment (cash or in kind) Stage 5. Profit and Loss Musharaka

I to share the profits? 0 mentaUNITS

oha

Stage 1.SPV issues Sukuk

Stage 2.Payment

Stage 6.Coupon Paymentprofit Stage 3.Investment

INVESTORS Stage 9.Redemption of Sukuk SPV/ISSUER/ TRUSTEE/ PARTNER Stage 5.Profit and Loss

3.4 Tax Neutrality

2 1 Sukuk investors tender payments to SPV SPV issues sukuk Transactions Sukuk instruments -subject to DST No tax consequence. Tax Consequence

4 3 SPV invests to musharakah Units Originator invests to musharakah Units No tax consequence. No tax consequence. 5 Profit and Loss Originator, subject to regular income tax and VAT,if applicable.

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6. Coupon payment, profits are distributed to the Subject to final withholding tax at the varying SPV.subject to income tax,VAT exempt.

Sukuk holders. rates: a. b. C. Exempt if maturity is 5 years or more 25% if Sukuk holders are non-resident 20% if maturity is less than 5 years

8 T At maturity,SPV sells its musharakah Units Payments on musharakah Units received by SPV No tax consequence. No tax consequence. In the case of certificate pre foreign corporation, termination-Subject to FWT with aliens not engaged in trade or business in the Philippines or non-resident varying rates.

9. Redemption of sukuk No tax consequence.

4Sukuk al-mudarabah

4.1 Mudarabah means an agreement between two parties according to which one of the two parties provides the capital (capital provider and for the other mudarib to work with on the condition that the profit is to be shared between them according to a pre-agreed ratio. Losses, if any, are borne by capital providers only

4.2 Like their musharakah counterparts, Sukuk-al-mudarabah may be used by Islamic banks to raise regulatory capital and, in these cases, the Sukuk are usually perpetual and subject to conversion provisions.

4.3 Figure 4.Transaction structure diagram of Sukuk al-mudarabah

TNTERPRISF

and Management stageS.Cash+Enterpris

MUDARABA AGREEMENT Stage 7.Performance fees (if ary) ccording to the Mudaraba Agree

Stage 4.Enterprise and Manaemen

ORIGINATOR Stage 3. Cash 2

tfamvacc g to the Mudaraba

E.SUMU

Stage 2. Cash Stage9.Periodic return from Mudaraba Proft

SPV/TRUSTEE/ISSUER INVESTORS

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4.4 Tax Neutrality

SPV issues Sukuk, which represent an undivided ownership interest in an underlying asset. Transactions Sukuk instruments-subject to DST Tax Consequence

2 3 4 Originator. agrees to contribute its expertise and The Investors subscribe for Sukuk and pay the SPV and Originator enter into a mudarabah the Principal Amount for the purpose of a transaction or project. proceeds to SPV(thePrincipal Amount mudarabah enterprise. Agreement, under which SPV agrees to contribute No tax consequence. No tax consequence. No tax consequence.

5. management skills to the mudarabah enterprise. SPV and Originator enter into the mudarabah No tax consequence.

7.Originator may be entitled to a performance fee for 6. 9. SPV pays each periodic return to Investors using the the Principal Amount. Profits generated by the mudarabah enterprise are SPV receives the mudarabah profits and holds them enterprise with the purpose of generating profit on divided between SPV and Originator in accordance with the profit-sharing ratios set out in the mudarabah Agreement. providing its expertise and management skills if the profit generated by the mudarabah enterprise exceeds a benchmarked return. as Trustee on behalf of the Investors. mudarabah profits it has received under the mudarabah Agreement. Originator, subject to regular income tax and VAT,if applicable SPV, subject to regular income tax. Originator, subject to regular income tax and VAT,if applicable. Subject to final withholding tax at the SPV, subject to regular income tax. VAT exempt. varying rates: VAT exempt. 3 b 20% if maturity is less than 5 Exempt if maturity is 5 years or years

C.: d In the case of certificate pre- 25% if Sukuk holders are non- resident aliens not engaged in trade or business in the Philippines or non-resident foreign corporation, more termination -subject to FWT with varying rates.

5 Sukuk al-wakalah.

5.1 principal (investors,via SPV and the agent, which among others governs the Sukuk al-wakalah are based on an agency contract. Normally this is used in its investment agency variant (wakalah bi al-istithmar wherein the agent invests the fund into a pool of eligible investments or assets.Commonly, the pool of investment is originally held by the obligor. The obligor in its capacity as an agent will manage the investment based on the agreement between the maturity and the relevant exercise price. expected return (profit)and fees (usually performance based.A sale/purchase undertaking agreement governs the purchase undertaking by the obligor upon

5.2 Sukuk al-wakalah is a further Sukuk structure sometimes used for bank regulatory capital, normally in perpetual form and with convertibility provisions. BUREAU OFINTERNALREVENUE O RECORDS MANAGEMENT DIVISION 6 10

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53 Figure 5: Transaction structure diagram of sukuk al-wakalah

.II.

ASSETS SPV/ISSUER PRINCIPAL TRUSTEE/

TG as the Servicing Agent Wakilto manage the Wakala assets ipinato INVESTORS

STAGE 4.Originator pays periodic returns generated by the Wakala assets to SPV

ORIGINATOR /SERVICING AGENT date), the Originator buys the Wakala assets back & pays the price to SPV STAGE 6.At maturity (dissolution

5.4 Tax Neutrality

I 2. 3. 4 5. SPV purchasers from the Originator a portfolio of SPV issues Sukuk and collects proceeds SPV appoints the Originator as the Service Agent Originator pays periodic returns generated by the SPV pays periodic profit coupons income-generating assets "Wakil" to manage the wakalah assets wakalah assets to SPV Transactions Sukuk instruments -subject to DST. No tax consequence. No tax consequence. SPV,subject to regular income tax.VAT exempt. Subject to final withholding tax at the varying Tax Consequence

rates: a. b. 20% if maturity is less than 5 years Exempt if maturity is 5 years or more

C d. In the case of certificate pre- 25% if Sukuk holders are non-resident aliens not engaged in trade or business in the Philippines or non-resident foreign corporation,

termination-subject to FWT with

6. Redemption of Sukuk At maturity(dissolution date,the Originator buys the wakalah assets back & pays the price to SPV No tax consequence. No tax consequence. varying rates.

6 Sukuk al-istisna'a

6.1 highways. installments. The price can be paid in a lump sum or in installments, as agreed Istisna'a refers to the sale of a specified asset, with an obligation on the part of on a specific date in return for a specific price to be paid in one lump sum or between the parties. Istisna'a can be used for financing the manufacture or construction of houses, plants, projects, and building of bridges, roads and the seller to manufacture/construct it using his own materials and to deliver it

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6.2 The issuer of the Sukuk is in principle the manufacturer (supplier/seller, the originator is the buyer, while the funds realized from subscription are the cost of manufacturing/constructing the product.However,an SPV is not a suitable entity to undertake a substantial manufacturing/construction project and the suitability of Sukuk al-istisna'a for financing purposes is based on the permissibility for the contractor in istisnaa to enter into a parallel istisnaa of a facility for a deferred price, and subcontract the actual construction to a Specialized firm. contract with a subcontractor. Thus,the SPV may undertake the construction

6.3 The istisna'a contract is often combined with an advance lease contract ijara) distribution to the Sukuk holders. The diagram below incorporates this feature. This allows payments during the construction phase which are available for

6.4 Figure 6: Transaction structure diagram of Sukuk al-Istisna'a

5tage 6.SPV (entirely or in batches) latter pays periodicall Originator Istisna'a and the leases assets to the rent Stage 2.Originator enters into an Istisna'a agreement with SPV to manufacture the specified assets payment for the Istisna'a assets Stage 3. SPV makes a down SPV/ISSUER/ TRUSTEE remainder of Stage 4.SPV proceeds in investments invests the authorised the Sukuk S easedassets? ruica atentforth INVESTORS

ORIGINATOR date),the Originator buys the Istisnaa assets back & pays the price to SPV STAGE 8.At maturity dissolution nvestments compliant Shariah ? F

6.5 Tax Neutrality

2 3. SPV issues Sukuk and collects proceeds Originator enters into an istisna'a agreement with SPV makes a down payment for the istisna'a SPV to manufacture the specified assets Transactions Sukuk instruments - subject to DST. No tax consequence. No tax consequence Tax Consequence

4 assets SPV invests the remainder of the Sukuk proceeds SPV, subject to regular income tax.VAT exempt.

6. 5 to the Originator and the latter pays rent Originator manufactures and sells the istisna'a assets entirely or in batches to the SPV and the latter makes progress payments accordingly SPV leases istisna'a assets (entirely or in batches) in authorized investments. periodically Originator is subject to regular income tax and VAT,if applicable. SPV,subject to regular income tax.VAT exempt.

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7.SPV pays periodic profit coupons Subject to final withholding tax at the varying rates: b. a 20% if maturity is less than 5 years Exempt if maturity is 5 years or more

8 At maturity dissolution date, the Originator buys No tax consequence. C. d. 25% if Sukuk holders are non-resident aliens not engaged in trade or business in the Philippines or non-resident foreign corporation, In the case of certificate pre- termination -subject to FWT with varying rates.

9 Redemption of Sukuk the istisnaa assets back and pays the price to SPV No tax consequence.

7. Sukuk al-salam

11 against an advanced full payment of the price. Salam is the sale of a specific commodity, well defined in its quality and quantity which will be delivered to the purchaser on a fixed date in the future

7.2 agent will normally enter into a parallel salam contract to sell the goods once The issuer of the certificates (the SPV is the buyer of the goods of salam. while the originator is the seller. The SPV (possibly through the originator as they are received.

7.3 90 days would be a typical period. For a number of reasons, salam-based Sukuk are usually short-term instrument;

7.4 Figure 7:Transaction structure diagram of Sukuk al-salam

Sp

SPV/TRUSTEE/ISSUER

Originator as its agent to sell the Salam assets once delivered Stage 3.SPV appoints the INVESTORS

Stage 4. Originator undertakes to sell the Salam assets at a price that will provide the Sukuk holders with the target profit Sp Kt me L 3Ar

ORIGINATOR Stage 5. At maturity.Originator delivers the assets and then sells the same (as an agent) to an end buyer with a profit END BUYER

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7.5 Tax Neutrality

1. 2. 3. SpV makes an immediate payment to purchase the SPV issues Sukuk and collects proceeds SPV appoints the Originator as its agents to sell salamassets (deferred deliveryfrom the Originator Transactions Sukuk instruments -subject to DST No tax consequence. No tax consequence. Tax Consequence

4 5. 6. Redemption of Sukuk Originator undertakes to sell the salam assets at a At maturity. Originator delivers the assets and then sells the same (as an agent to an end buyer Originator pays the sale price principal + profit of the salam assets to the SPV the salam assets once delivered price that will provide the sukuk holders with the target profit with a profit No tax consequence Subject to final withholding tax at the varying Originator subject to regular income tax and VAT,if applicable SPV subject to regular income tax.VAT rates: exempt. a b C d 20% if maturity is less than 5 years Exempt if maturity is 5 years or more 25% if Sukuk holders are non-resident aliens not engaged in trade or business In the case of certificate pre- in the Philippines or non-resident varying rates. foreign corporation termination-subject to FWTwith

gains. Given the evolving nature of tax laws and regulations, it's crucial for stakeholders to stay informed about the specific tax implications associated with Sukuk transactions. markets, providing Shariah-compliant investment opportunities and alternative financing options. Understanding the taxability of Sukuk is essential for both issuers and investors, as it involves considerations such as documentary stamp tax,withholding tax, and the tax treatment of income and In conclusion, Sukuk represent an important and growing segment of the global financial

publicity as possible. All internal revenue officers and other concerned are enjoined to give this Circular as wide a

Comuyssioner of Internal Revenue OMI H,JR

1K-1

BUREAU OFINTERNALREVENUE RECORDSMANAGEMENTDIVISION

Se

JUL 18 2024 14

BY M DMINUNT- IIME 24 Dom