Taxation of

Financial Institutions
in the Philip/fines
First Edition
Copyright © 2006 by Punongbayan & Araullo

All rights reserved.

No part of this work covered by the copyright hereon may be
reproduced and/or used in any form or by any means — graphic
electronic or mechanical — without the written permission of
the author and the publisher. To the memory of my parents,
Simeon, Sr. and Juanita
ISBN 978-971-93586-0-2

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Du-Baladad, Benedicta
1 7:4664

Taxation of Financial Institutions in the Philippines

by Benedicta Du-Baladad – First Edition - Makati City
Punongbayan & Araullo, c2006
iv

ACKNOWLEDGEME S

It is my pleasure to acknowledge all the people who, in one way or another,

made this book a reality.
Foremost is Ben Punongbayan, who showed so much faith in me, giving me
the confidence to write this book.

My husband, Benny, for all the unconditional support; my sons, Bryan, Benedict
and Benjamin, who are all my source of pride and inspiration; and, of course, my little
son, Berton, who constantly craves for my attention and keeps me relaxed and sane.

Special recognition, and expression of appreciation, is also given to all those

who labored for this book - Lina Figueroa and Senen Quizon for the technical review,
and Melissa Valledor and Angelo Arboleda for the editing.
 vfi

I also thank the partners and staff of Punongbayan & Araullo, especially Greg
Navarro, Fred Damian, Gabby Oledan and those in the Tax Division and Markets Group,
for all the assistance and encouragement.

Thanks are also due to all my clients in the financial services sector who, because
of the various and complex issues they have referred to me for study, have somehow
opened my eyes to the real difficulties in the application of the present tax laws to
financial institutions, thus further deepening my desire for, and dedication to, the
fulfillment of this endeavor.

FOREWORD

Writing a comprehensive and reliable reference on the rules and regulations

governing taxation of banks and other financial intermediaries is no simple task. Banks,
insurance companies, and similar institutions have sizeable, complex. operations that
are governed by equally complicated tax systems. Capturing the whole picture requires
in-depth knowledge and a keen understanding of the dynamism and nuances of local
taxation.
In the true spirit of thought leadership, a tax partner of Punongbayan &Araullo
(P&A), leading a team of high-level tax consultants, accepted this challenge. And the
result is the book you now hold in your hands.
P&A sponsored the publication of this book primarily to provide financial
institutions with a ready reference on the tax structure that governs them, thereby
vu'

helping improve their understanding of applicable tax laws and their level of
compliance.
CON1ENTS
With the author's grasp of the fundamentals of taxation sharpened by
experience in handling live tax cases, this book brings together a strong infusion of Preface 1
theory and practice. With her two decades of tax experience . in both the government
and private sectors, the author offers insightful analysis of issues affecting the taxation
of financial institutions. Chapter I.
Taxation of Financial Institutions: General Rules
P&A would like to thank the author, Dick Du-Baladad, for the time and effort
put into completing this book, and for sharing her expertise with other industry Income tax
professionals who are interested in the subject. On our part, P&A is committed to Regular income tax 5
sponsoring the planned annual update of this first edition of the book. Minimum corporate income tax 7
Improperly accumulated earnings tax 9
Tax on passive and other income 9
Business taxes
Gross receipts tax 11
Benjanun R. Pun Premium tax 13
Chairman & CEO Value-added tax 13
Punongbayan & Araullo
April 2006 Documentary stamp tax 14
Local taxes 14

Chapter II. Banks

Definition and classification 15

Income tax
Taxation of RBUs 20
Regular income tax 20
Operating income
Allowable deductions
Minimum corporate income tax 26
Taxable base
 Taxation of certain banking transactions/products 28 Gross receipts tax
Sales of ROPOA Rates of GRT 98
Deposit substitute Effect of pretermination of instrument 100
Long-term deposits and placement Non-lending income subject to 7% 102
Bonds Determination of gross receipts 104
IBCLs and repurchase agreements Gross receipts defined 104
Individual trust funds, common trust funds and Net trading gains 107
investment management accounts Cumulative reporting of net gains
Derivatives 59 Net gains from ROPOA 111
Special Purpose Vehicle Act 6o Determination of net gains
Securitization Act 62 Accrual vs. actual collection 112
Taxation of OBUs and FCDUs 63 Gross receipts include amount of tax withheld 115
Nature of OBUs and FCDUs 63 Banks are liable to GRT only u6
Background on the taxation of OBUs and FCDUs 65 GRT on OBU and FCDU transactions 116
RA 9294, the current law 71
Banks covered Documentary stamp tax
Exemption of offshore income Documents and transactions subject to DST ' 118
Tax on onshore income Debt instruments 120
Tax on income of nonresidents Rate and application
Exemption of gains from long-term dollar bonds DST on debt instruments imposed
Dollar-denominated FCDU treasury notes only on original issuance
Restoration of exemptions by RA 9294 82 Bank deposits with specific maturity date
Allocation of expenses between RBU and FCDU 85 Special savings deposit accounts
Bills of exchange 128
Branch profit remittance tax Mortgages and pledges 129
BPRT on OBUs and FCDUs 86 Foreclosure and sales or conveyance of ROPOA 130
BPRT liability under RA 8424 88 Documents and transactions exempt from DST 131
Liability of OBUs and FCDUs to DST 137
Improperly accumulated earnings tax 88 Special rules on payment and filing of DST 138
Use of metering machines 138
Withholding tax obligations Banks as statutory payors of DST 139
Final withholding tax 90
On interest income 90 Rules specific to certain types of banks
Exempt organizations Rural banks 140
On dividend income 94 Tax incentives 141
On foreclosure sales 94 Foreclosure sales subject to two-year redemption period 143
Creditable withholding tax 96 Thrift banks 143
Tax incentives 143
xii

Credit cooperatives and cooperative banks 144 Chapter III. Insurance

Nature of business 1 44
Taxation 145 Definition and classification 161
Income tax
VAT and GRT Income taxation
Tax exemption coverage Regular income tax 167
Taxes not covered by exemptions Special deductions in general 168
Non-transferability of tax-free imported goods Reserves
Liability to withholding taxes Special deductions for mutual insurance 169
Transactions with banks and insurance companies Minimum corporate income tax 170
Individual members not covered by exemption Taxation of certain transactions related to insurance business 172
Examination of books by the BIR Life insurance proceeds and returns of premiums 172
NSSLAs and BLAs 152 Proceeds of life insurance received by the estate 1 73
Nature of operations 152 Compensation for injuries or sickness under
Taxes 153 a health and accident insurance 173
NSSLAs Tax exemptions of trusteed retirement plans 174
BLAs Premium paid for group life insurance 177
Liability to GRT Tax advantages of certain insurance products 177
Trust companies 155
Nature of business 155 Branch profit remittance tax 179
Regulation and supervision 15 6
Taxes 156 Improperly accumulated earnings tax 18©
Administrative requirement for trust entities 157
* Withholding taxes
Government banks Withholding tax obligations 184)
Land Bank of the Philippines 15 8 Reverse withholding for brokers' and agents' commission 182
Development Bank of the Philippines 1 59 Withholding of VAT on premiums received
Philippine National Bank 16o or reinsurance premium ceded 183
Al-Amanah Islamic Investment Bank ,6o Income of insurance companies subject to withholding tax 184
Premiums received if payor is a TTC 184
Business taxes
Premium tax on life insurance companies 188
Background 184
The premium tax 187
Exclusions from premium tax
Taxation of variable contracts 18 9
Taxation of separate variable accounts
xiv xv

Applicability of premium tax Emerging insurance business

Interest income not subject to premium tax or VAT 193 Pre-need business 214

Other income subject to VAT or 3% percentage tax 1 94 Pre-need business in the Philippines 214
Exemption of purely cooperative
Classification 215
companies from premium tax 195
Income tax and other taxes 216

Agents of foreign insurance companies 196 Value-added tax 217

VAT on non-life insurance
companies 197 Invoicing
In general 197 General provisions of VAT Law apply

VAT on non-life insurance 198 Documentary stamp tax 221
Gross receipts
Health maintenance organizations 221
Registration for mixed business of life and non-life
Nature of business 221
Commissions and reinsurance commissions
Income tax and other taxes 222
Professional reinsurers
Value-added tax 223
Input tax on claims and losses Exemption of medical services
• Other incomes do not apply to HMOs
Withholding of creditable VAT . 203 HMOs as non-life insurance providers
5% final withholding VAT
Documentary stamp tax 224
on government money payments
10% final withholding VAT on reinsurance Government insurance companies
premiums paid to nonresidents
The GSIS and the SSS 225

Tax exemption 225
Documentary stamp tax Exemptions under the GSIS .& SSS Charters

Base and rate 205 Exemptions under the Tax Code

Life insurance policies 206 Benefits received from the SSS and the GSIS 228
Taxable base: premium collected
Contributions to the SSS and the GSIS 228
Variable contracts 208
As financial intermediaries 229
DST on insurance policies covering properties abroad 208
Philippine Deposit Insurance Corporation 229
Documents and transactions exempt from DST 209
Philippine Crop Insurance Corporation 230
Special rules on payment and filing of DST 210

Use of metering machines 210

Insurance companies as statutory payors of DST 210

Fire tax 211

Taxation of banks vs. insurance companies

Premium tax vs. gross receipts tax 212
Long-term investments 213
Qualified tax-exempt retirement and pension trusts 213
 xvii

Chapter W. Financing Companies Governmenffinancmg institutions

Home Development Mutual Fund 252

Home Guaranty Corporation 254
Classification and definition
The business of financing companies 232

Taxes Chapter V.
Investment Houses and Investment Companies
Income tax 2 34

Regular income tax 2 34
235
Minimum corporate income tax
Investment house
Withholding taxes 236

Improperly accumulated earnings tax 237 Definition 255

Gross receipts tax 237 Classification 257

Taxable base 237 Specific regulatory requirements 257

Pretermination 238 Taxes 258

Financing companies with QB functions 238 Income tax and other taxes 258
Gains on trading or redemption of long-term
Power of the BIR Commissioner to impose the same tax 239
commercial papers
Documentary stamp tax 239
Interest income on debt instruments issued by
Prevalent types of financing companies investment houses

Finance leasing companies 24o Improperly accumulated earnings tax 259

Nature of business 24o Gross receipts tax 260
Income tax 242 GRT rate
Determination of interest component GRT base

Exemptions granted to lessees under a finance Iease Documentary stamp tax 261
Withholding tax 244 Trading of shares of stock
Gross receipts tax 245 Cash-settled securities swap transaction
Taxable base Securities borrowing and lending
Tax rate Applicability of DST on electronic documents
Characterization of the lease
Renting or leasing by non-finance leasing companies Investment company

Documentary stamp tax 247 Definition 265

Credit card companies 247 Classification 266

Nature of business 247 Taxes 267

Issuer vs. acquirer Income tax, MCIT, and other taxes 267
Taxes 249 Dividends distributed by mutual funds
Withholding taxes Dividends vs. capital gains in mutual funds
Gross receipts tax
Documentary stamp tax
it
Gross receipts tax 270 Chapter VI.
Improperly accumulated earning tax 270 Other Financial Institutions
Documentary stamp tax 270

Securities brokers and dealers Pawnshops

Nature of business 271 Nature of business 283
Taxes 27 2 Income tax and other taxes 284
Income tax, MCIT and other taxes 272 Gross receipts tax 2 85
Improperly accumulated earning tax 272 Documentary stamp tax 2 87
Value-added tax 273
Tax base Venture capital corporations
Initial public offerings not subject to VAT Nature of business 288
Documentary stamp tax 274 Taxes 288
Sale of shares of stocks by a person other than
a dealer in securities 275 Money changers or foreign exchange dealers
Capital gains tax 275 Taxes 289
Tax rate
Exemption of CGT under tax treaties Holding companies
Returns and payment Nature of business 290
Stock transaction tax 277 Tax treatment 291
Tax rate and base
Returns and payment Lending investors
Initial public offering tax 277 Nature of business 292
Tax rate and base Taxes 292
Closely held corporations
Returns and payment
Effect of nonpayment of tax
Chapter VII. Local Taxes
The Philippine Stock Exchange
Sale of membership seat in the PSE 280
Tax rate 293
PSE as statutory payor of DST 281
Coverage
Banks and other banking institutions 294
Insurance companies 295
Financing companies 296

Tax base
Banks and other banking institutions 297
xx xxi

GRT vs. LBT 29 8

Insurance companies 29 8 Regulatory issues on certain industries
Premium tax vs. LBT 300 Dual supervision 322
Financing companies 300 NBFIs with QB, trust or IMA licenses 323
Parents and subsidiaries with different licenses 323
Situs of taxation Pre-need companies 324
Banks 301 NSSLAs and BLAs 325
Insurance companies 301 Cooperative banks 325
Investment houses and investment companies 326
Filing and payment 302 Lending investors 327
Health maintenance organizations 326

Chapter VIII Filing and Payment

Chapter X. Administrative Aspects

Venue for filing and payment

eFiling and Payment System 314 Compliance and implementation 336

Special rules on filing and payment Role of financial institutions in tax administration
Insurance companies 315 As accredited agent banks 337
Stockbrokers 315 As withholding agents 337
Separate filing of returns for FCDUs 316
Special rules on the filing and payment
of DST and percentage taxes 316
Chapter XI Emerging Issues

Chapter IX. Regulation and Supervision Money laundering and secrecy provisions 339
Practices in foreign jurisdiction 341

Bangko Sentral ng Filipinas 319 Regulation and supervision 343

Securities and Exchange Commission 320 Taxes 344

Insurance Commission 321

 Annexes

Annex A. Acronyms 347

Annex B. Laws and Regulations on Financial Institutions

Republic Act No. 9294 351
Revenue Regulations No. 10-98 359
Republic Act No. 9238 365
Revenue Regulations No. 09-04 375
Republic Act No. 9243 389
Revenue Regulations No. 13 -04 395
Revenue Memorandum Circular No. 04-03 410

Annex C. Laws and Issuances 417

Annex D. References 439

Annex E. Court Cases 441

Index 445
PREFACE

Role of Financial Institutions

The role of financial institutions is vital to the economic development of the

Philippines Financial institutions, after all, have a wide range of involvement in
practically all sectors of the economy including household, business and government.
They play a major role in the facilitation of regional and international financial
intermediation to support the financial needs of these various sectors.

Financial institutions manage the finances, investments and resources of the

different sectors of the economy. The management of resources (which are considered
scarce vis-à-vis the competing needs for their utilization) is important to ensure that
these are used productively. Financial institutions are the most effective agents for
mobilizing resources and putting them into practical and viable uses. By acting as
intermediaries between resource owners and users, financial institutions are able to
2 3
provide the funds necessary to achieve business growth and consequently, economic
growth for the country. Through their credit facilities and other services, financial
institutions are able to empower the members of the household, and most importantly,
the business sector, to sustain their consumption expenditures as their needs grow or
expand.
So pervasive is the role of financial institutions in the attainment of the country's
economic growth that policy initiatives have been crafted over time to optimize such
role, and at the same time provide protection to the public transacting with these
institutions. These policy initiatives cover a broad area of application including the
regulation and supervision of their operations, but most importantly, the adoption of
a tax regime that is applicable and responsive to their needs.
The Underlying Objective
Taxation of financial institutions has always been a difficult yet interesting
topic for discussion. The complexities of the nature of their business and the markets
they serve, the variety of products, and the speed at which these are developed, have
posed enormous challenges not only to the government but to the industry as well.
Through the years, taxation of financial institutions in the Philippines has
undergone several changes. Understandably, the government has had to keep up with
rapid changes in the financial environment -1 the development of new products, the
polarization of businesses, the emergence of new businesses that are hybrids and cannot
be distinctly classified. In the process, the structure of the tax system governing these
institutions has become so complicated that it became difficult — from the perspective
of tax implementation — to understand and comply with the rules. For example, the
banking industry has been saddled with billions in tax assessment arising from various
industry issues. Insurance companies, both life and non-life, have been similarly in
dispute with the Bureau of Internal Revenue (BIR) regarding the tax treatment of
certain issues relating to their business. For a long time, the taxation of pawnshops
was unresolved until the Supreme Court recently intervened to settle the conflict. Pre-
need companies and health maintenance organizations (HMOs) are still struggling to
find the proper taxation applicable to them.
The government's desire to institute an ideal system of taxation applicable to
the financial sector has been affected heavily by policy considerations, specifically the
need to strike a balance between creating an active and healthy environment for the
financial system and generating additional tax revenues. Thus, to a large extent, the
taxation of financial institutions has been crafted so that the policy directions of the
government, especially as they relate to the economy, are attained. Recent laws such
as RA 9243, which rationalizes the documentary stamp tax, and RA 9294, vilu'ch
restores the exemption of offshore banking units and foreign currency deposit units,
are a reflection of this intent.
Coupled with the problem of taxation is the concern over the regulatory
framework for these financial institutions. Regulatory agencies find it hard to keep up
with the rapid developments. For example, in the Philippines, the inability of the
government to adequately regulate pre-need companies has led to the erosion of public
confidence in investing in these types of entities. Even now, there are debates on the
real nature of pre-need businesses, particularly whether these are insurance companies
that should be regulated by the Insurance Commission (IC), or securities dealers that
should be regulated by the Securities and Exchange Commission (SEC). The same is
true for another emerging industry, the health maintenance organization's (HMO).
In my 17 years in tax administration and five years in public tax practice, I
have witnessed the continuing struggle of both the tax authority and the industry sectors
in trying to come up with, and agree on, a fair, appropriate and feasible taxation system
applicable to the financial sector. However, due to the long gestation period of tax
laws vis-à-vis the very dynamic business of financial intermediation, both sides — the
government and the private enterprises — continue to find themselves at an impasse,
one that challenges them to constantly seek an ideal tax system that will be responsive
to the needs of all stakeholders.
This book presents a comprehensive discussion of the tax regime applicable to
financial institutions in the Philippines with the objective of providing readers —
whether from the corporate world, the academe or the government sector — with a
better understanding of the way financial institutions (and the products they offer)
are taxed in this country. It likewise serves as a handy reference to suit the different
users' respective purposes. The opinions contained in this book regarding certain areas
where no clear rules are provided are the opinions of the author and do not necessarily
reflect the official stand of the publisher.
4 5

Organization of the Chapters
This book is composed of 11 chapters. The first chapter presents the tax system
applicable in general to all businesses operating in the Philippines. The main sections,
Chapters II to VI, discuss the taxation of the different financial institutions: banks,
insurance companies, financing companies, investment houses, investment companies
and other financial intermediaries. Chapter VII refers to local taxation. Chapters VIII
and X present the administrative aspect such as filing of returns and payment of taxes,
while chapter IX discusses the regulatory framework. The last chapter is a discussion
of emerging issues and problems affecting the financial system in the country.
This book contains a comprehensive discussion of the taxes applicable to
financial institutions such as income taxes (regular income tax and the minimum
corporate income tax), business taxes (the gross receipts tax, premium tax and the
VAT), documentary stamp tax, improperly accumulated earnings tax and local tax. In
presenting the taxation applicable to each industry, the most recent laws (RAs 9294,
9238, 9243 and 9337) and their implementing regulations have been considered.
Likewise, issuances by the BIR, the Department of Finance (DOF), the Bangko Sentral
ng Pilipinas (BSP), the SEC as well as the Bureau of Local Government Finance (with
respect to local taxes) have been taken into account. With regard to matters not clarified
in the law or in the regulations or rulings of the BIR, the author presented her own
observation, opinion or analysis on how taxation could be applied with due regard for
the generally accepted principles of taxation taken in harmony with the existing laws
as prescribed.
Chapter II refers to the taxation of banks (universal banks, commercial banks,
thrift banks, rural banks, government banks), other banking institutions and
intermediaries with quasi-banking functions. It includes a discussion of the taxation
applicable to a bank's regular business compared to the taxation of its foreign currency
deposit unit or that of OBUs. Industry issues that are currently the subject of disputes,
including those elevated to the courts, are discussed. Chapter III refers to insurance
companies, that is, life, non-life and re-insurance. It also includes a discussion on the
taxation of pre-need companies and HMOs. The taxation of financing companies,
finance-leasing companies and credit card companies are discussed in Chapter N.
Chapter V pertains to the taxation of investment houses, investment companies, as
well as investment brokers and dealers, and Chapter VI covers pawnshops, lending
investors, foreign exchange dealers and holding companies.
CHAPTER
I Taxation of
Financial Institutions:
General Rules
INCOME TAX
Regular income tax
Financial institutions are liable to the regular corporate
income tax, based on their taxable net income [Section 27(A), Tax
Code], at a tax rate of 35% beginning November 1, 2005, to be
reduced to 3o% effective January 1, 2009 [Republic Act (RA) No.
9337). Prior to November 1, 2005, the rate was 32%.
taxable net income The term "taxable net income" refers to items of gross
income specified under Section 32(A) of the Tax Code, such as
compensation for services rendered, gross income from the
conduct of trade or business, gains from dealings in property,
interests, rents, royalties, dividends, annuities, prizes and
winnings, and pensions, less the items of allowable deductions
under Section 34 of the Tax Code, or those allowed under special
laws.
tax rate Prior to RA 8424 (December 11, 1997), the applicable
corporate income tax rate was already at 35%. RA 8424 reduced
the rate on a staggered basis to 34% in 1998, 33% in 1999, and
32% beginning in 2000. This reduction was intended to rationalize
the corporate income tax structure ofthe Philippines vis-a-vis other
6 Chapter
countries of the Association of South East Asian Nations (ASEAN),
and encourage more investments in the country.
It may be noted that the country's corporate income tax
rate of 35% before 1998 was quite high compared with Singapore's
26%, or with the 3o% of Brunei, Indonesia, Malaysia and Thailand.
Even the 32% corporate income tax rate that prevailed until 2005
was still higher than most of the corporate income tax rates
imposed by other ASEAN countries. It is perhaps for this reason
that there are proposals to further review the corporate income
tax rate. It is also for this reason that the increase of the corporate
income tax rate from 32% to 35% under RA 9337 became a source
of concern for many business groups. In any case, the consoling
aspect is that beginning January 1, 2009, the rate shall be 3o%.
The items of gross income reported by financial
institutions are normally in the nature of interests, service fees,
allowable deductions charges and rents. Allowable deductions from gross income are
ordinary and necessary business expenses that are directly ,or
indirectly related to the generation of taxable income, and
appropriate to the authorized business undertakings of financial
institutions. These deductions are made up of the following,
among others: (1) ordinary and necessary business expenses such
as salaries, wages, and benefits paid to employees, (2) interest
paid on deposit or investments made by their clients; (3) taxes
paid to carry on authorized business such as documentary stamp
taxes, business taxes, local taxes and fees, (4) depreciation of
properties such as buildings, armored cars, furniture and fixtures,
(5) charitable and other contributions, (6) bad debts, (7) research
and development expenditures, and (8) contributions to pension
trusts set up in favor of employees of financial institutions.
ceilings Considering that deductions have the effect of diminishing
the taxable base, there have been efforts to make operative the
provision in the last paragraph of Section 34 of the Tax Code
authorizing the Secretary of Finance, upon recommendation of
the Commissioner of Internal Revenue, to prescribe limitations
or ceilings for any of the itemized deductions allowed to be taken
against gross income. In fact, a ceiling is already prescribed for
General Rules 7
entertainment, amusement, and recreational expenses under
10-02 (July lo 2002).
Revenue Regulations (RR) No. ,
In the case of financial institutions, the prescribed limit
of entertainment, amusement and recreation expenses allowed
as deduction from gross income is that applicable to sellers of
services, which is 1%.
In exercising his authority to determine the ceilings or
limitations, the Secretary of Finance shall, pursuant to the Tax
Code, consider the following factors: (a) adequacy of the presorted
limits on the actual expenditure requirements of each particular
industry, and (b) effects of inflation on expenditure levels.
However, this authority of the Secretary of Finance shall no loge
extend to items of deductions that are already subject to ceilings
under the present law. For example, charitable contributions are
subject to a cap of 5% of the corporation's taxable income
computed without tfinenefit of the deduction, while deductible
interest expense is reduced by 42% of interest income subjected
to final tax.
vittttv
$E1
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Minimum corporate income tax
gross income-based Because of the enormous problems of tax collection and
tax administration related to abusive claims for specific item of
deduction, there was a proposal to adopt a system of gross income
taxation. The proposal may appear a bit radical, but it may be
noted that there are already impositions in the Tax Code applicable
to corporations, including financial institutions, that are gross-
based, such as the minimum corporate income tax (MCP].).
The MCIT was first introduced by RA 8424 as a
mechanismto ensure that a business entity that perennially reports
a loss is somehow made to share in the burden of taxation. This
rationale is boosted by the argument that government services,
which are mostly funded by tax revenues, are universally given,
1'
8 Chapter I
regardless of whether the beneficiary entity is earning an income
or incurring a loss. The MCIT may also be viewed as a mechanism
to deter any attempt to minimize or avoid the payment of income
tax by perpetually reporting a loss.
The MCIT is payable beginning in the fourth taxable year
immediately following the year when a corporation commenced
its -business operations. It is payable when the MCI which is
equivalent to 2% of the corporation's gross income, is greater than
the regular income tax of 35% computed based on net taxable
income. Any excess of the MCIT paid over the computed regular
tax can be carried forward as tax credit for the three immediately
succeeding taxable years.
gross income For purposes of the MCIT, the term "gross income" for
business entities engaged in the sale of service means gross receipts
less sales returns, allowances, discounts and cost of services. The
cost of services allowed as deduction includes all direct costs and
expenses necessarily incurred to provide the services required by
the customers and clients, including: (a) salaries and benefits of
personnel, consultants and specialists directly rendering the
service, and (b) cost of facilities directly utilized in providing the
service, such as depreciation or rental of equipment used and cost,
of supplies. In the case of banks, the cost of services includes
interest expenses [Section 27(E)(4), Tax Code].
The MCIT provision in the Tax Code is implemented by
RR o9-98 (August 25, 1998). The composition of the gross income
subject to the MCIT on a per industry basis, including for banks,
insurance companies and other nonbankfinancial intermediaries/
institutions (NBFIs), was further defined in Revenue
Memorandum Circular (RMC) No. 04-03 (December 31, 2002).
(Refer to MCIT discussions in Chapters II to VI.)
General Rules 9
Improperly accumulated earnings tax
RA 8424 revived the concept of an improperly
accumulated earnings tax or IAET (Section 29, Tax Code) following
the re-imposition of the tax on dividends paid to .individual
shareholders. The IAET is equivalent to 10% (same rate as the tax
on dividend) of the improperly accumulated taxable income of a
corporation. It is in the nature of a surcharge or penalty imposed
on corporations that allow their earnings and profits to accumulate
instead of being divided or distributed, thereby avoiding the 10%
income tax due on the dividends that may be received by individual
shareholders. •
financial institutions
However, ,the IAET does not apply to (a) publicly held
exempt from IAET corporations, (b) banks and other NBFIs, and (c) insurance
companies. The general exemption of financial institutions from
IAET stems from the fact that the business operations of financial
institutions usually require fund build-up or accumulation.
litukt
bond I A
t-tio nz .
Tax on passive and other income
passive income mostly Other than their income from regular operations, financial
subject to FWT institutions may also earn income from investments (passive
income) or from transactions that are not within the regular course
of their business They may have interest income, dividends, or
capital gains earned from the sale of their capital assets, among
others. These types of income are normally subject to different
rates of income tax, which are collected in the form of a final
withholding tax (FWT).
interest For example, interest income from currency deposits or
placements with other banks is subject to a 20% final tax if in
Philippine currency, or 7.5% if in foreign currency. Gains derived
from the sale or exchange of shares of stock in a domestic
corporation not traded through the local stock exchange are subject
 v‘tt
ki L
10 Chapter I
Otg" t cot'
to a two-tiered final tax structure, to wit: 5% for net capital gains
shares of stock not in excess of P100,000 and io% in excess thereof. If the shares
of stock are listed and traded through the local stock exchange,
they are subject to a tax of V2 of 1% of the gross value in money of
the said shares of stock [Section 127(A), Tax Code]. The lower tax
rate imposed on sale of listed shares is intended to encourage
listing of shares through the stock exchange and promote the
growth of the capital market.
On the other hand, gains derived from the sale or exchange
of land or buildings that are treated as capital assets are subject to
a final tax of 6% based on the higher of the gross selling price or
fair market value, as determined by the Commissioner of Internal
Revenue (such as the zonal values), or the fair market value as
indicated in the schedule of values of the Provincial and City
capital asset Assessor (Section 6, Tax Code). A capital asset refers to property
that is held by taxpayers, whether or not connected with their trade
or business, but does not include stock-in-trade or inventory, or
assets primarily held for sale to customers in the ordinary course
of business, or real property used in trade or business [Section
39(A)(1), Tax Code]. (See more detailed discussions in Chapters
II to VI.)
BUSINESS TAXES
Other than income tax, financial institutions are also
subject to business taxes. The type of business tax applicable to a
business entity varies depending on the nature of the business of
the financial institution. For example, banks and life insurance
companies are subject to a percentage tax (gross receipts tax and
premium tax, respectively), while others, like non-life insurance
and pre-need companies, are subject to value-added tax (VAT).
General Rules 11
Gross receipts tax
background One of the major, and perhaps most controversial, taxes
imposed on the business of financial institutions is the gross
receipts tax (GRT). The GRT is essentially a type of percentage
tax that is levied on the gross receipts of financial institutions.
Most of the percentage taxes (which are essentially taxes on the
sale of goods or services) that prevailed in the Philippines were
replaced by VAT, which was introduced by Executive Order (BO)
No. 273 on-July 25, 1987.
As stated in the prefatory clauses of EO 273, VAT, which
is imposed on the gross sales or receipts derived from the sale of
goods or services, is designed to rationalize the prevailing system
of taxing goods and services, to simplify tax administration, and
to make the tax system more equitable. These objectives of BO
273 notwithstanding, the GRT imposed on financial institutions
was not changed.
RA 7716 (May 5, 1994) was the first attempt to include
the services rendered by banks, NBEls, finance companies and
other financial intermediaries within the ambit of the VAT. RA
7716, however, deferred the imposition of VAT on such services
to "two years from the effectivity of the Act" (i.e., 1996). Pending
their inclusion in the VAT net, the said services continued to be
subject to GRT.
The two-year grace period for the inclusion of financial
institutions in the coverage of VAT was intended to give these
institutions time to prepare for VAT and the various requirements
that would have to be fulfilled as a result of the transition from the
GRT system to the VAT system. It was likewise intended to allow
the financial institutions to make adjustments on their financial
intermediation costs in view of the possible repercussions of a
then 10% VAT versus a 5%, or even lower, GRT (the tax diminishes;
depending on the loan maturity). On the part of tax administrators,
this two-year period was intended to give them time to carefully
plan for the implementing guidelines that will be issued.
12 Chapter I
RA 8241 (December 20, 1996), otherwise known as the
Expanded VAT (EVAT) Law, again deferred the inclusion of
financial institutions within the coverage of VAT to January 1,
1998, owing again to the justifications earlier cited. The
government, at this point, realized the difficulty of subjecting
financial institutions to VAT. No country with a VAT system
similar to ours has imposed VAT on financial institutions, because
it is difficult to measure the value added on which the VAT rate
shall be imposed.
The deferment was further extended for the third and
fourth time to January 1, 2000 under RA 8424 (December
1997), and to January 1, 2001 under RA 8761 (February 15, 2000).
After the fifth and last deferment under RA 9010 (February 27,
2001), financial institutions finallybeca_me subject to VAT effective
January 1, 2003.
However, a number of issues surfaced relative to the
implementation of VAT. For example, there was difficulty in the
determination of inputs of financial institutions. The VAT system
allows VAT on inputs to be credited against VAT on outputs. In
addition, the government could not find precedent guidelines that
could be used as a model, because no country with a VAT system
similar to ours imposes VAT on financial institutions. Thus, in
drafting the implementing guidelines, there were various
discussions aimed at approximating the value added on the
intermediation services of financial institutions.
In view of these issues, RA 9238 (February 5, 2004) finally
excluded financial institutions from the scope of VAT beginning
January 1, 2004, and reverted the taxation of the services of these
institutions to GRT. Subsequently, the Bureau of Internal Revenue
(BIR) issued Bank Bulletin No. 2004-01 , RMC 09-04 (February
19, 2004), and RMC 10-04 (February 19, 2004) to provide the
guidelines for the implementation of RA 9238. (See discussions
on GRT in Chapters II, IV, V and VI.)
General Rules 13
Premium tax
The premium tax is a type of percentage tax imposed on
premiums collected by insurance companies. It is applicable to
life insurance companies only It does not apply to non-life
insurance companies, which are under the VAT system. (Refer to
detailed discussions of premium tax on life insurance companies
in Chapter III.)
Value-added tax
The adoption of the VAT system in the Philippines covered
a number of businesses engaged in the sale of services. Non-life
insurance companies Texcept crop insurance), including surety,
fidelity, indemnity and bonding companies, are liable to a 12%
VAT (10%, prior to February 1, 2006) based on gross receipts
derived from their insurance business (Section 108, Tax Code).
Pre-need insurance companies, health maintenance organizations
(HMOs), and dealers in securities are likewise subject to a 12%
VAT based on their gross receipts (Section 108, Tax Code).
Under the Philippine VAT system, the VAT liability is
computed using the "tax credit method," whereby input tax credits
are allowed to be offset from the output VAT on sales or receipts.
The 12% VAT, therefore, is reduced by the VAT paid on the inputs
used to produce the service. Input tax credit may arise from
purchase or importation of goods and services for use in the
business (Section no, Tax Code). (See further discussions in
Chapters III and VI.)
14 Chapter I
CHAPTER
DOCUMENTARY STAMP TAX
Many documents and transactions of financial institutions
are subject to a documentary stamp tax (DST). In fact, these are
the entities heavily burdened with the imposition of DST. For
this reason, the BIR required them to use the metering machine
to facilitate compliance and payment of their DST obligations. DST
is a tax on the transaction or on the privilege to exercise a right as
in the case of an excise tax, or simply a tax on the document itself.
Tax Code adopts
This can be shifted to the customer.
General Banking Act's
definition of banks
The rationalization of the DST structure introduced by
RA 9243 is intended primarily to promote the growth and
development of the Philippine capital market. The capital market
is a prolific source of financial resources to fund business
operations, which subsequently create employment and income-
yielding opportunities that are vital to economic growth and
development. (See detailed discussion in Chapters II and VI.)
LOCAL TAXES
Although this volume is focused on the national tax
obligations of financial institutions, it may be important to point
out that these institutions are also subject to the taxes imposed by
local government units (LGUs)—such as provinces, cities,
municipalities or barangays—where their business activities are
located or conducted. (See Chapter VII.)
The taxing power of LGUs is provided under the Local
Government Code (RA 7160, October to, 1991). The rate of local
business tax imposed by municipalities on financial institutions
depends on the location of the financial institution and the LGU
imposing it, whether it is a municipality or a city.
15
Banks
DEFINITION AND CLASSIFICATION
1
A bank is defined under the General Banking Azt-
Republic Act (RA) No. 337, as amended by RA 8791 (May 23,
2000)—as an entity engaged in the lending of funds obtained
in the form of deposits. The National Internal Revenue Code
(NIRC or Tax Code) refers to the same definition for taxation
purposes. Thus, the Tax Code defines the term "bank" to mean
every banking institution, as defined in the General Banking
Act, and which may be a commercial bank, a thrift bank, a
development bank, a rural bank or a specialized government
bank [Section 22(V), Tax Code].
In Revenue Regulations (RR) No. 09-04 (June al,
2004), issued by the Bureau of Internal Revenue (BIR) to
implement the provisions of RA 9238, the BIR gave a more
definitive definition of "banks or banking institutions." Banks
or banking institutions are those entities referred to under
Section 3 of RA 8791, as amended, otherwise known as the
General Banking Law of 2000.
The terms "banks" and "banking institutions" are
synonymous and interchangeable and specifically include
universal banks, commercial banks, thrift banks (savings and
mortgage banks, stock savings and loan associations, and
private development banks), cooperative banks, rural banks,
Islamic banks and other classifications of banks as may be
determined by the Monetary Board of the Bangko Sentra/ rig
Pilipinas (BSP).
1 1'
16 Chapter II
fI Banks are classified into:
Universal Banks (UB) — A universal bank is, for
all intents and purposes, a commercial bank.
However, in addition to the powers authorized
for a commercial bank, a universal bank may,
subject to certain conditions (equity ceilings, for
example; refer to Sections 23 to 28 of RA 8791
for details), invest in the equities of allied and
non-allied enterprises. Allied enterprises may
be either financial or nonfinancial in nature.
2. Commercial Banks (KB) — A commercial bank
is a corporation that has such powers as may
be necessary to carry on the business of
commercial banking, which includes, among
others, accepting drafts and issuing letters of
credit; discounting and negotiating promissory
notes, drafts, bills of exchange and other
evidences of debt; accepting or creating
demand deposits; receiving other types of
deposits and deposit substitutes; buying and
selling foreign exchange and gold or silver
bullion; acquiring marketable bonds and other
debt securities; and extending credit, subject
to certain conditions such as those that may be
promulgated by the Monetary Board relating to
the determination of bonds and other debt
securities eligible for investment, and the
maturity period and amounts of such
investment, among others. (Refer to Section
29 of RA 8791 for details.)
3. Thrift Banks (TB) — According to Section 3 of
RA 7906 (otherwise known as the Thrift Banks
Act of 1995, February 23, 1995), the term "thrift
banks" refers to savings and mortgage banks,
private development banks, stock savings and
Banks 17
loan associations, and banks that may be
organized for the following purposes: (a)
accumulating the savings of depositors and
investing them, together with capital loans
secured by bonds, mortgages in real estate and
insured improvements thereon, chattel
mortgage, bonds and other forms of security or
in loans for personal finance, whether secured
or unsecured, or in financing for homebuilding
and home development; in readily marketable
debt securities; in commercial papers and
accounts receivables, drafts, bills of exchange,
acceptances or notes arising out of commercial
transactions; and in such other investments and
loans that may be determined by the Monetary
Board to be necessary in the furtherance of
national economic objectives; (131 providing
short-term capital, medium- and long-term
financingfor businesses engaged in agriculture,
services, industry and housing; and (c)
providing diversified financial and allied
services for its chosen markets and
constituencies, especially for small and medium
enterprises and individuals.
4. Rural Banks (RB) — Rural banks are privately
owned banks that provide credit facilities to
farmers or merchants or to cooperatives of such
farmers and merchants under reasonable
terms. Clients of rural banks are the residents
of rural communities. Rural banks may or may
not be allowed to accept demand deposits (RA
7353, otherwise known as the Rural Banks Act
of 1992, April 2, 1992).
5. Cooperative Banks — A cooperative bank is a
bank that is owned by its members and
generally caters to their financing
I8 Chapter II Banks 19
requirements. (Refer to RA 6938, otherwise
known as the Cooperative Code of the
Philippines, March 10, 1990.)
6. Al-Amanah Islamic Investment Bank — The Al-
Amanah Islamic Investment Bank was
organized (pursuant to RA 6848, otherwise
known as the charter of the Al-Amanah Islamic
Investment Bank of the Philippines, January
26,1990) to promote and accelerate the socio-
economic development of the Muslim
Autonomous Region by performing banking,
financing and investment operations, and
establishing and participating in agricultural,
commercial and industrial ventures based on
the Islamic concept of banking.
7. Offshore Banking Units (OBUs) — Offshore
banking refers to the conduct of banking
transactions in foreign currencies involving the
receipt of funds principally from external
sources and the utilization of such funds subject
to certain conditions. [Refer to Presidential
Decree (PD) Nos. 1034 and 1035 (September
30, 1996) and RA 9294 (April 28, 2004).] An
OBU is a branch, subsidiary or affiliate of a
foreign banking corporation duly authorized by
the BSP to transact offshore banking business
in the Philippines. While PD 1034 established
the framework for OBUs, PD 1035 established
the framework for the expanded foreign
currency deposit units (EFCDUs). The term
"FCDU" refers to an accounting unit or
department in a local bank, or in an existing
local branch of foreign banks, that is authorized
by the BSP to operate under the expanded
foreign currency deposit system, subject to
certain conditions. (Refer to PD 1034 and 1035
for details.)
As to ownership or nationality, banks are classified into
foreign or domestic, and private or government-owned.
A foreign bank is a bank that is organized under laws
other than those of the Philippines and is authorized to do
banking business in the Philippines, whereas a domestic or local
bank is one that is organized under the laws of the Philippines.
A privately owned bank refers to any bank whose
ownership is generally in the hands of private individuals or
institutions. A government-owned bank, on the other hand,
refers to any bank owned or controlled by the government of
the Republic of the Philippines.
The banking sector of the country's financial system is
made up of a variety of banks, with each type of bank serving a
particular market. There are rural banks that serve the financial
requirements of the countryside. There are thrift banks that
respond to the financial requirements of small savers. There
are universal and commercial banks that cater to the financial
requirements of big savers or business enterprises with bigger
financial resources and needs.
As of December 2005, a total of 7,67o banks (879 head
offices. and 6,791 other offices) have been set up all over the
country. Of this total, 4,318 represent commercial/universal
banks;. 1,293 represent thrift banks; and 2,059 represent rural
banks. In addition, there are 31 nonbank financial institutkres/
intermediaries (NBFIs) with quasi-banking (QB) functions.
20 Chapter II Banks 21
INCOME TAX
Taxation of Regular Banking Units
Regular income tax
OPERATING INCOME The income derived by a bank from its regular banking
unit (RBU) operations is subject to the corporate income tax
rate of 35% based on taxable net income, that is, income from
operation less the allowable items of deductions [Sections 27(A)
and 28(A) of the Tax Code for domestic banks and resident
foreign banks, respectively]. Being in the regular business of
lending, discounting, leasing, or performing financial
intermediation services, the interest income derived by banks,
which is generally considered a passive income and reported
as non-operating income by other business entities, is
considered an operating or ordinary income subject to the
regular income tax of 35%.
interest income is While the interest income derived by a bank from any
ordinary income income-producing activity is generally subject to the regular
35% income tax (unless otherwise exempt), there is also interest
income that is subject to other tax rates imposed as final taxes
in lieu of the regular income tax. For example, the interest
income earned by a bank on its local currency bank deposits
with other banks, or from its placement in deposit substitutes
and similar arrangements, is subject to a final tax at the rate of
20% on the gross amount of interest. On the other hand, its
interest income on foreign currency deposits is subject to a final
tax of 7.5% of such income [Sections 27(D)(1) and 28(A)(7)(a),
Tax Code].
A separate discussion on the income taxation of specific
products and transactions peculiar to banks is presented in the
succeeding part of this chapter.
ALLOWABLE Banks are governed by the same rules applicable to
DEDUCTIONS other business entities on the items of expenses that could be
allowed as deduction from gross income to arrive at the taxable. :
base. There are, however, special rules applicable to banks with
respect to bad debts and interest expense deductions.
Bad debts Under RR 05-99 (March 10, 1999), as revised by RR
25-02 (November 19, 2002), strict rules have been laid down
for the deductibility of bad debts. A bad debt, to be allowed as
deduction from gross income, must comply with thb following:
1. There must be an existing indebtedness that
must be valid and legally demandable.
2. The same must be connected with the
taxpayer's trade, business or practice of
profession.
3. The same must not be sustained in transactions
entered into between related parties such as
those under Section 36 of the Tax Code. (See
discussion below.)
4. The same must be actually charged off the books
of accounts of the taxpayer as of the end of the
taxable year.
5. The same must be actually ascertained to be
worthless and uncollectible as of the end of the
taxable year.
22 Chapter II
The Tax Code specifically prohibits the deductibility of
bad debts in the following related-party transactions [Section
36(B), Tax Code]:
1. The borrower is an individual directly or
indirectly owning more than 5o% in value of
the outstanding stock of the bank.
2. More than 5o% in value of the outstanding stock
of both the borrower and the bank is owned,
directly or indirectly, by or for the same
individual, if the borrower is a personal holding
company or a foreign personal holding
company.
BSP Certificate of Pursuant to RR 05-99, a bank claiming a deduction for
Worthlessness bad debt is only required, in lieu of requisite No. 5 as stated
above, to secure a certification from the BSP to the effect that
the accounts are worthless and can be written off (RR 5-99,
March 10, 1999). With this rule, banks do not have to comply
with the higher degree of proof of worthlessness required from
other entities claiming a bad debts deduction. The normal proof
of worthlessness required under No. 5 includes a collection case
filed in court, a proof that earnest efforts to collect were made
but were futile, or a court's declaration of the bankruptcy of
the borrower and similar instances. In the case of banks, the
certification from the BSP is sufficient proof to comply with
requirement No. 5. This, in effect, places banks in a different
position compared to other businesses, including other
financial institutions that are not under the supervision of the
BSP—such as those under the Securities and Exchange
Commission (SEC)—with respect to bad debts deduction.
This special treatment for banks was, however,
withdrawn by RR 25-02 (November 19, 2002). RR 25-02
reverted to the Commissioner of Internal Revenue the power
to make the final determination on whether the bad debts
Banks 23
claimed by banks are worthless and uncollectible, the BSP
certificate being merely recommendatory to the BIR. The new
RR clarified that banks are still required to submit the BSP's
written approval of the writing off of bad debts but without
prejudice to the Commissioner's final determination of its
deductibility for tax purposes. Thus, claims for bad debts by
hanks, like those by other financial institutions, have to be
scrutinized and validated by the BIR; in addition, banks have
to secure a certification from the BSP allowing the writing off
of such bad debts.
Note that the loan loss provision required to be set up
by banks under BSP Circular No. 313, series of 2001 (December
27, 2001), is not allowed as a tax deduction at the time it is set
up. It is only when these are actually ascertained to be wortMess
in accordance with requirement Nos. 1 to 5 above that a proper
deduction for tax is allowed. Being merely a provision, any
claim for tax deduction is considered premature.
Interest In general, interest paid or incurred by a bank in
connection with its business is allowed as a deduction from its
gross income provided it complies with all the requisites for
deductibility under RR 13-00 (November 20, 2000) as follows:
2. There must be an indebtedness.
2. There must be an interest expense paid or
incurred upon such indebtedness.
3. The indebtedness must be that of the taxpayer.
4. The indebtedness must be connected with the
taxpayer's trade, business or exercise of
profession.
5. The interest expense must have been paid or
incurred during the taxable year.
 Chapter II
24
6. The interest must be stipulated in writing and
legally due.
The interest payment arrangement must not be
7.
between related parties, similar to the
restriction imposed on deduction for bad debts.
8. In case of interest incurred to acquire a property
to be used in business, the same is not treated
as a capital expenditure.
Interest arbitrage Pursuant to the reform introduced by RA 8424, the
limitation amount of interest expense shall be reduced by a value equal
to 38% of the interest income subject to final tax to derive the
interest expense that may be allowed as deduction from gross
income. As a necessary consequence of the increase in income
tax rate from 32% to 35% under RA 9337, this 38% reduction
was correspondingly increased to 42% (and then to be reduced
again to 33%, effective January 1, 2009, upon the effectivity of
the reduced income tax rate of 3o%).
This limitation imposed on interest deduction is
applicable to all business entities, whether banks or otherwise.
It is intended to prevent the practice of interest arbitrage
whereby one borrows money and claims a deduction on the
interest paid, then turns around to lend that same borrowed
money to earn interest income subject to a lower rate. This is
sometimes called the back-to-back transaction. It is entered
into to get the advantage of the difference in the rates applied
to income as against the benefit derived from claiming a
deduction, that is, a 35% benefit in the form of a deduction on
the interest expense vis-à-vis a 2o% final tax on the interest
income earned.
As applied to banks, however, there may be sufficient
reason to argue that the interest expense of banks and other
financial institutions is not subject to the interest arbitrage
Banks 25
limitation. This view finds legal support under Section 34(B)
of the Tax Code, which imposes the interest arbitrage limitation
only on the items of deductions from gross income (such as
operating and administrative expenses) but not from gross sales
(such as direct costs). For sellers of services such as banks,
direct costs pertain to the "cost of services," which, in the case
of banks, includes interest expenses.
The interest arbitrage limitation provision applies only
to the items of deduction below the gross income level referring
to items of expenses other than direct costs. Gross income is
defined as gross sales less (a) returns, allowances and discounts
and (b) cost of services. In the case of banks, "cost of services"
includes interest expense [Section 27(E)(4), Tax Code]. Thus,
an interest expense, being in the nature of a direct cost for
banks, may not be subject to the limitation but may be allowed
to be claimed as a deduction in full from gross income.
But in a related ruling, the BIR rejected the request of
Land Bank of the Philippines (LBP), Development Bank of the
Philippines (DBP) and the Philippine National Bank (PNB) to
be exempted from this interest limitation, citing that the
interest arbitrage provision in the law did not provide for
exemption (BIR Ruling No. DA-246-98, June 17, 1998). The
ruling relied on the provision in the law that provides that the
interest arbitrage limitation applies regardless of the intent or
regardless of the existence of an actual arbitrage.
However, in a more recent ruling, the BIR somehow
relaxed the application of the rules by allowing the interest
expenses incurred on reserve cash deposits required to be
maintained with the BSP to be exempted from this limitation.
The BIR has clarified that since the minimum balance deposit
is required by the government, the interest arbitrage limitation
does not apply because the bank could not have intended to
take undue benefit through an interest arbitrage (BIR Ruling
No. DA-315-o4, June 8, 2004).
26 Chapter II
Related party limitation Similar to bad debts, the Tax Code does not allow the
deduction of interest expense arising from transactions with
related persons/entities such as those mentioned in the case of
claims for bad debts deduction. The purpose of the limitation
is to prevent dubious claims of interest expense deduction
arising from non-existing or fictitious loans that could be
entered into by related or controlled parties in order to transfer
income or expenses to the entity that would yield the most tax
savings. Hence, interest expense on a loan transaction between
members of a family or between a bank and an individual more
than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by or for such individual, is not deductible.
Minimum corporate income tax
Similar to other business entities, banks are subject to
the minimum corporate income tax (MCIT) of 2% based on
gross income beginning in the fourth year of operation when
the regular income tax is lower than the MCIT.
In the case of OBUs, however, since their income is
either exempt from income tax or subject to a final tax and not
the regular corporate income tax, the MCIT does not apply
[Section 2.28(A)(2), RR o9-98, August 25, 19981
TAXABLE BASE For MCIT purposes, the gross income of sellers of
services (such as banks) refers to gross receipts less (a) sales
returns, allowances, discounts, and (b) cost of services. "Cost
of services" pertains to all direct costs and expenses necessarily
incurred to provide the services required by the customers and
clients including: (a) salaries and employee benefits of
personnel, consultants and specialists directly rendering the
service, and (b) depreciation or rental of equipment used and
cost of supplies. In the case of banks, the interest expense is
part of the cost of services [Section 27(E)(4), Tax Code].
Banks 27
To further clarify these definitions, the BIR issued
Revenue Memorandum Circular (RMC) No. 04-03 (December
31, 2002), which provides guidelines for different industries,
including banks, in the determination of the gross income
subject to MCIT. In the case of banks, RMC 04-03 imposes a
two-level limitation two-level limitation on the items of deductible cost of services.
First, RMC 04-03 limits the "cost of services" only to
the expenses incurred directly and exclusively for the following
transactions: (a) lending and investment of funds; (b) obtaining
of funds from the public through receipt of deposits; and (c)
trading of foreign exchange and other instruments.
Second, RMC 04-03 requires that these expenses be
limited to the following: (a) salaries, wages and other employee
benefits of personnel directly engaged in banking activities; (b)
interest expense except interest charged by, or paid tb, the head
office on funds considered/classified as assigned capital of the
branch; (c) Philippine Deposit Insurance Corporation (MC)
premium payments; and (d) BSP supervision fee.
RMC 04-03 more Effectively, RMC 04-03 is even more restrictive than
restrictive than Tax the Tax Code with respect to the items that could be claimed as
Code provision deduction from gross income. RMC 04-03 further expanded
the limitations provided under the Tax Code. Section 27 of the
Tax Code is clear that "cost of services" pertains to all direct
costs and expenses necessarily incurred to provide the serves
required by the customers and clients including salaries and
employee benefits, consultants and specialists, depreciation or
rental of equipment used and costs of supplies. While the Tax
Code allows depreciation and rental of equipment, costs of
supplies and payment to consultants to be claimed as deduction
for purposes of MCIT, these were not included as deductible
items under RMC 04-03.
In addition, while income derived from the other
businesses of the banks—such as those related to the sale of
real and other properties owned or acquired (ROPOA) and

28 Chap ter U
other allied services—are included in gross income subject to
MCIT, the necessary expenses incurred to generate said income
are not allowed as deduction. This mismatch in the tax
treatment of the income vis-à-vis its corresponding expense
may be viewed 'as an unfair application of the law.
These restrictions imposed by RMC 04-03, which
directly contradict the specific provisions of the Tax Code, cast
doubts on the validity of RMC 04-03. As a basic principle of
law, an administrative issuance such as RMC 04-03 is only
meant to implement the law, not supplant it by superseding or
expanding its coverage or the limitations imposed by it.
Taxation of certain banking
transactions and products
SALES OF ROPOA For banks, the ROPOA is treated as an ordinary asset
notwithstanding the fact that banks, for tax purposes, are not
considered habitually engaged in the real estate business. Thus,
the gains derived from the disposition of ROPOA are lumped with
the other ordinaiyincome subject to the regular corporate income
tax rate of 35% based on net taxable income (BIR Ruling No. 103-
98, June 29, 1998; RR 07-03, dated December 27, 2002).
ROPOA are ordinary This tax treatment is a tacit recognition of the operating
assets of banks realities confronting the tanking institutions that, while not
actually engaged in the business of selling land and/or buildings,
are likely to find themselves holding on to enormous properties
and selling themregularly to recover their financial exposures.
The ROPOA are assets that are not used in the ordinary
course of business but are acquired only as a necessary
consequence of an institution's banking and lending operations.
Ordinarily, gains arising from the disposition of land and/or
buildings that are not actually used in the course of trade or
Banks 29
business and are treated as capital assets are subject to a final
tax of 6% based on the gross selling price or fair market value
as determined by the BIR, or the fair market value as shown in
the schedule of values of the provincial and city assessors,
whichever is higher [Section 27(D)(5), Tax Code].
While the gain is not subject to the 6% final capital gains
tax (CGT), it is subject to creditable withholding tax (CWT) at
the same rate of 6% based on the selling price or zonal value of
the ROPOA, the amount of which shall be withheld and
remitted to the BIR by the buyer. The 6% tax withheld, being
in the nature of a CWT, can be used as a credit against the bank's
taxable income in the year the gain is realized.
In comparison, taxpayers who are habitually engaged
in the real estate business and who, like banks, are subject to
the regular corporate income tax on gains from the 'disposition
of real properties, enjoy lower rates of CWT graduated at 1.5%,
3% and 5% depending on the selling price of the property.
DEPOSIT A deposit substitute is an alternative form of obtaining
SUBSTITUTE funds from the public (which the Tax Code defines as 20 or
more individual or corporate lenders at any one time), other
than deposits, through the issuance, endorsement or
,
acceptance of debt instruments for the borrower's own account,
for purposes of re-lending or purchasing of receivables and
other obligations, or financing their own needs or the needs of
their agents or dealers.
These instruments include, but are not limited to, the
following: (a) bankers' acceptances, (b) promissory notes, (c)
repurchase agreements including reverse repurchase
agreements entered into by and between the BSP and any
authorized agent bank, (d) certificates of assignment or
participation, and (e) similar instruments with recourse.
However, these instruments shall not be considered deposit
substitute instruments, if issued for interbank call loans (IBCis)
30 Chapter II Banks 31
with a maturity of not more than five days to cover deficiency
in reserves against deposit liabilities, including those between
or among banks and quasi-banks [Section 22(Y), Tax Code].
borrowing is a chief "Borrowing" is a deposit substitute's chief feature.
feature of a deposit Without borrowing, there is no deposit substitute. Thus, cash-
substitute settled securities swap transactions (CSSTs) under the
Memorandum of Agreement entered into by the BSP, the
Bureau of Treasury (BTr), the Bankers Association of the
Philippines (BAP), and the Investment House Association of
the Philippines (MAP) is not a deposit substitute, since there
is no borrowing or debt instrument involved. The CSST is an
agreement to buy and sell government securities spot, and sell or
buy comparable securities at a pre-determined future date and
price with the same counter party (RMC 62-03, October 8, 2003).
Taxation of deposit A final tax is imposed on the amount of interest and
substitute yield or any other monetary benefit earned from deposit
substitutes at the following rates:
1. 20% final withholding tax (FWT) if the income
recipient is an individual citizen or a resident
alien or a nonresident alien engaged in trade
or business in the Philippines [Sections
24(B)(1) and 25(A)(2), Tax Code]
2. 25% FWT if the income recipient is a
nonresident alien individual not engaged in
trade or business in the Philippines [(Section
25(B), Tax Code]
3. 20% FWT if the income recipient is a domestic
or resident foreign corporation [Sections
27(D)(1) and•28(A)(7)(a), Tax Code]
4. 35% FWT if the income recipient is a
nonresident foreign corporation [Section
28(B)(1), Tax Code]
5. The applicable treaty rate if the income
recipient is a nonresident alien not engaged in
business in the Philippines or a nonresident
foreign corporation that is a resident of any
country with which the Philippines has a tax
treaty
1 6. Exempt if the recipient is an individual and the
interest income arises from a long-term deposit
substitute (see discussions in the succeeding
sections)
7. Exempt if the recipient is a foreign government;
a financing institution owned or controlled by,
or enjoying refinancing from, a foreign
government; or an international pr regional
financial institution established by a foreign
government
The tax imposed is in the nature of an FWT and 140 be
withheld and remitted by the payor of the interest, yid or
benefit. Being in the nature of a final tax, it is considered to be
in full satisfaction of any form of income tax that may be due
on the income. The income, therefore, does not even have to
be included in the income tax return of the recipient.
Any interest income or yield arising from any form of
issuance, endorsement or acceptance of debt instruments but
which cannot be considered a deposit substitute (such as when
the 20-lender rule is not met) shall not be subject to FWT.
However, the recipient of the interest or yield is required to
include the amount received as part of its taxable income
subject to the regular income tax.
trading gains on The final taxes (as above) imposed on interest income
deposit substitutes or yield from deposit substitute do not apply to the gains derived
from trading, retirement or redemption of the instrument.
Unlike in the case of interest income or yield that is subject to
32 Chap ter II
a final tax, gains derived from trading or retirement of the
instruments are subject to the regular income tax rates: (a) 35%
based on net income in the case of domestic and resident
corporations; (b) 5-32% of net income in the case of citizens
and resident or nonresident aliens engaged in business in the
Philippines; (c) 25% FWT on gross income in the case of
nonresident individuals not engaged in business in the
Philippines; (d) 35% FWT on gross income in the case of
nonresident foreign corporations; or (e) the applicable treaty
rates for residents of treaty countries.
Trading and redemption gains derived from retirement
of bonds, debentures and other certificates of indebtedness with
a maturity of more than five years are, however, exempt from
income tax. (See discussions in succeeding sections of this
chapter.)
The 20 lender rule
- To be considered a deposit substitute, the issuance or
endorsement of the debt instrument is required to be made to
the public. The term "public" means 20 or more individual or
corporate lenders at any one time. Thus, for debt instruments
and securities to be considered deposit substitutes, the 20-
lender rule (i.e., the requirement that it must be issued to 20
or more individual or corporate lenders) must be complied with.
The 20-lender rule, or the determination of the number
"at any one time" of lenders, is reckoned "at any one time" at the time of the
original issuance in the primary market, because it is on the
original issuance that the act of borrowing is done. It is in the
primary market that the issuer sells the instrument to the
public. In effect, it is the time when the borrower is said to
"issue" the financial asset. Thus, it has been held in many BIR
rulings that the time element "at any one time" is reckoned
when the borrowing or issuance is done in the primary market
or at original issue (BIR Ruling. No. 007-04, July 16, 2004).
In the case of instruments sold or issued in tranche,
the determination of the 2o-lender rule is on each tranche of
Banks 33
primary issuance. The 2o-lender rule is applied separately and
is determined based on the number of lenders at the time of
the issuance of each tranche (BIR Ruling No. DA-161-04, April
5, 2004). Each tranche is considered a separate issuance for
purposes of determining the requirement "at any one time" in
reckoning the 20-lender rule.
Subsequent trading among investors in the secondary
market is merely an act of buying and selling and not borrowing
in nature. Considering, therefore, that the trading in the
secondary market is not an act of borrowing or lending, which
is a necessary element of a deposit substitute, it is not
considered in the determination of the 20-lender rule.
government issuances In a recent ruling, however, the BIR ruled that the mere
deemed issued to issuance of government debt instruments and securities is
the public deemed to be a public issuance, and these are therefore
considered deposit substitutes regardless of the number of
actual lenders at the time of the origination (BIR Ruling No.
007-04).
This ruling revoked all contrary prior issuances of the
BIR with respect to government issuances. To reiterate this
position, the BIR confirmed in a subsequent ruling issued to
the Bureau of Treasury that the matter of determining the
number of lenders does not apply insofar as government debt
instruments and securities are concerned (BIR Ruling No. DA-
491-04, September 13, 2004) because government securities,
by their very nature, are meant to be issued to the public. (See
also discussion on government bonds in this chapter.)
LONG-TERM The income derived from a long-term deposit with a
DEPOSITS AND bank has been the subject of varying opinions from the BIR,
PLACEMENT the Courts and the banking sector. As noted below, the taxation
of income from long-term deposits varies depending on the
nature of the income (whether interest or trading gain) and of
the depositor (whether corporate or individual).
34 Chapter II Banks 35 I
Definition A long-term deposit or investment certificate refers to
a certificate of time deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes,
investment management accounts and other investments with
a maturity period of not less than five years, the form of which
shall be prescribed by the BSP. This should be issued by banks
only (not by NBFIs and finance companies) to individuals in
denominations of Pio,000 and other denominations as may
be prescribed by the BSP [Section 22(FF), Tax Code]. Thus, as
defined, a long-term deposit refers only to deposits and
investment instruments issued by banks to individuals with a
maturity of not less than five years.
'ti
Interest income from There is an explicit provision in the Tax Code on the
long-term deposits exemption of interest income derived by individuals from long-
term deposits or placements [Sections 24(B)(1) and 25(A)(2),
Tax Code), but none for corporations. In short, the law
distinguishes the tax treatment of interest income from long-
term deposits with banks depending on the recipient of the
income. The exemption from income tax refers only to the
interest income or yield (not on other gains) received by
individuals (not corporations).
requirements for Hence, for the interest income from long-term deposits
exemption of interest to be exempt from income tax, and consequently from
income from income tax withholding tax, the following conditions must be present:
1. The long-term deposit or investment must have
a maturity period of not less than five years.
2. It must be in the form of savings, common or
individual trust funds, deposit substitutes,
investment management accounts or other
investments in the forms prescribed by the BSP.
3. It must be issued only by banks, not by NBFIs
and finance companies.
4. It must be issued to individual citizens, or
resident or nonresident aliens engaged in trade
or business in the Philippines.
5. It must be in denominations of Pio,00n or
other denominations as prescribed by the MP.
6. It should not be terminated by the investor
before the fifth year. Otherwise, the graduated
rates of 5%, 12% or 20%, depending on the
remaining maturity of the instruments, shall
apply [BIR Ruling No. 30-01 (July 24, sow)
and Sections 24(B)(1) and 25(A)(2), Tax Code].
The final tax is imposed on the entire income to be
deducted and withheld by the depository bank based on the
remaining maturity as follows:
1. Four years to less than five years — 5%
2. Three years to less than four years — 12%
3. Less than three years — 20%
Trading and Other than interest income or yield from investment,
redemption gains the second type of income that may be earned when investing
from long-term in securities pertains to the gains that may be realized when
securities the securities are traded or sold before their maturity. Grins
may also be realized when the securities are redeemed Ivan
maturity (surrendered to the issuer) and the investor or lender
is given back the amount of investment made in such securities.
A foreign exchange gain may likewise be earned specially if the
Philippine peso-denominated instrument is indexed to a
foreign currency (e.g., dollar or yen). The peso gain arises when
the Philippine currency depreciates versus the foreign currency.
withholding tax does Since these items of income (referring to trading onus,
not apply to gains redemption gains and foreign exchange gains) are gains from
trading, retirement and redemption of the securities, and are
 36 Chapter II
not in the nature of an interest income, the requirement to
withhold a 2o% (or the applicable rate) final tax applicable to
interest income does not apply.
Likewise, the rules on exemption from income tax
applicable to interest income received by individuals on long-
term deposits do not apply. Instead, these are subject to the
regular income tax applicable to individuals at the rates ranging
from 5% to 32%, or to corporations at the rate of 35%.
income tax exemption There is, however, a similar exemption from income
of gains on long-term tax on gains derived from trading, redemption or retirement
securities of long-term securities. More specifically, the Tax Code
provides that gains realized from the sale or exchange or
retirement of bonds, debentures or other certificates of
indebtedness with a maturity of more than five years are
excluded from gross income and are therefore exempt from
income tax [Section 32(g), Tax Code]. The term or maturity of
the debt instruments, which must be more than five years, is
critical in determining whether the gains are to be subject to
income tax or not.
The exemption of gains under Section 32(g) of the Tax
Code refers specifically to gains derived or realized from the
sale, exchange or retirement of the debt securities such as
trading gains or gains upon redemption. As regards foreign
exchange gains, there are no clear rules whether these are
considered part of trading gains or redemption gains that are
covered by the exemption. Considering, however, that the
foreign exchange gains are imbedded into, and are only an
incidental component of, the gains arising from either trading
or redemption of the securities, it may be included in the
exemption as part of the gain derived from trading or
redemption of the securities.
Interest income vs. It is important to make a distinction between an interest
trading and income and a trading gain or gain from redemption. For tax
redemption gains purposes, an interest income is not the same as a gain, which is
Banks 37
normally associated with trading or redemption of the securities
held.
Interest income represents forbearance for the use of
money. It is synonymous with discounts. Although the term
"interest" is often used to decide the rate applied to take monies
forward in time, there really is no difference between a discount
rate and an interest rate, and practitioners often use the term
"yield" in lieu of either (Marshall & Bansal, 1992). Thus,
interest, discount or yield (others call it commission) can be
used interchangeably. The term "yield" represents an amount
that the investor receives from its investment other than the
return of its capital. More specifically, the yield is the amount
that the issuer or debtor is obligated to pay to an investor as a
return for the use or forbearance of money that the investor
lends to, or places with, the issuer or debtor.
trading, redemption and A trading gain, on the other hand, refers to the gain
forex gains are not realized from secondary trading, which is the difference
interests between the selling price in the secondary market and the price
at which the same bonds or debt instruments are purchased by
the seller, either from origination or from the secondary market.
A redemption gain is realized upon redemption or
retirement of the instrument. The gain from retirement or
redemption of the instrument upon maturity is computed as
the difference between the proceeds from the retirement of the
instrument and the price at which such last holder acquired
the instrument.
The amounts paid on the retirement of the debt
instruments are considered payments in exchange of a property
[Section 39(E), Tax Code] and not yield, interest or monetary
benefit, because these amounts are not income derived from
the use or forbearance of money but are income derived from
the sale or disposition of a property. The gain that may be
derived from trading or redemption of securities is dependent
on many factors such as market situation and volatility.
38 Chapter II
Likewise, foreign exchange gains are not the same as
interest income since the foreign exchange gain is earned not
for the use or forbearance of money but is dependent on the
appreciation or depreciation of the Philippine currency relative
to the foreign currency against which the instruments are
indexed (BIR Ruling No. 052-01, November 16, 2001).
discounts are interests For a discounted instrument, a trading gain arises only
if the instrument is sold above par (RR 26-02, December 5,
2002). Par value refers to the original purchase price plus the
accumulated discount from the time of purchase up to the time
of sale. The original issue discount (in the case of zero-coupon
instruments) is not a gain from trading or a redemption but is
an interest or yield. Thus, the rules applicable to taxation of
interest, rather than the taxation of gains, shall apply.
The distinction between an interest income and a
trading gain has been extensively discussed by the Court of Tax
Appeals (CTA) in Malayan Insurance Co., Inc. v.
Commissioner of Internal Revenue (2002), involving a claim
for refund or issuance of a tax credit certificate representing
alleged erroneously withheld 20% final tax on interest income
from long-term investments with a maturity period of more
than five years.
The BIR earlier issued an opinion exempting a
corporation (not an individual) from the payment of the 20%
tax withheld on the interest income earned from long-term
deposits, citing as basis the exemption pertaining to gains from
long-term debts under Section 32 (g) of the Tax Code. This
ruling was used by many taxpayers in claiming a refund from
the BIR for the 20% final tax paid by them on similar
transactions claiming that these were erroneously paid. These
claims for tax refund were eventually elevated to the CTA for
resolution.
The CTA ruled, and the Court of Appeals (CA) has
upheld in a number of decisions, that: (1) there is a clear
Banks 39
distinction between interests and gains derived from deeHngs
in property [Section 32(A), Tax Code]; (2) only the gains
realized from the sale or exchange or retirement of bonds,
debentures or other certificates of indebtednesswith a maturity
period of more than five years are excluded from gross income
and thus exempt from income tax; (3) the exemption on interest
income pertains only to individuals and not to corporations;
and (4) corporations are subject to a 20% final tax on their
interest income from their long-term placements or
investments. This CTA decision effectively revoked the ruling
earlier issued by the BIR on the matter.
The conditions for the exemption of interest income
under Sections 24(B)(1) and 25(A)(2) of the Tax Code Wier
from the conditions for the exemption of the trading and
redemption gains under Section 32(g) of the same Code, to wit:
income recipient First, the income tax exemption on interest income
applies only if the recipient of the interest income Is an
individual and not a corporation. The exemption of trading
and redemption gains, on the other hand, applies to both
corporate and individual depositors or holders of debt
instruments.
maturity period Second, the maturityperiod of the securities or the
period, in the case of bank deposits and placement, differs by one
day. For an interest income to be exempt, the deposit or bank
placement must be for a period of not less than five years. Titus,
interest income arising from bank deposits and investments with
a maturity period of exactly five years is already covered by the
exemption. On the other hand, in the case of trading and
redemption gains derived from long-term securities, the maturity
period requiredfor the trading and redemption gains to be swept
is more than five years (or five years and one day). Unlike lathe
case of interest income, gains derived from investments with a
maturity period of exactly five years are not exempt from income
tax. As a result of this one-day difference in the maturity of the
instruments for purposes of applying the tax exemptions, it is
40 Chapter II
possible that an interest income derived from securities with a
term of exactly five years will be exempt from income tax, but the
gains derived from its trading or redemption thereof will still be
subject to income tax.
holding period Third, the reference point for purposes of counting the
five-year period differs. One refers to the "holding period,"
while the other refers to the maturity period of the instrument.
The exemption of interest income from bank deposits and
placements requires a "holding period" of not less than five
years, which means that the fund is required to be invested or
deposited with a bank by an individual for not less than five
years either in savings, common or individual trust funds,
investment management accounts, deposit substitutes and
other investments. The exemption of trading gains, on the other
hand, refers to the maturity period of the instrument, which
means that as long as the instrument has a maturity of more
than five years, regardless of the length of time an investor holds
on to the instrument, the gain is exempt from income tax.
issuer Fourth, the exemption on interest income refers only
to deposits or investment certificates issued by banks and in a
form of which shall be prescribed by the BSP. The exemption
on trading gains refers to all bonds, debentures or certificates
of indebtedness, whether the issuer is a bank or a nonbank.
BONDS Bonds are generally long-term debt instruments that
are intended to serve multiple purpose's. They may be issued
by private corporations or by the government. In the case of
private corporations, bonds are normally issued to raise capital
necessary to finance business expenditures and expansion.
Similarly, government bonds are issued or floated to finance
public expenditures or projects (such as infrastructures,
education, health and other social services), to fill the gap in
the budget deficit, or to repay government debts.
Banks 41
The holder of the bond or the person to whom the bond
is issued is typically an investor who puts money or funds in an
investment option that yields a stream of income to the said
income from bonds investor. There are two types of income that an investor in
bonds may derive. The first is the interest earned at the coupon
date (the date when the bond holder presents the coupon for
the payment of interest) based on the coupon rate (the interest
rate of the bond). In the case of zero-coupon bonds, the
discount is an interest that is amortized up to maturity. The
second is the gain, if any, which is earned when the bonds are
traded before maturity date or when redeemed upon maturity.
While the interest income is normally pegged at a
certain rate, the gain from trading or from redemption is not
readily predictable. In fact, in some instances, as in the case of
U.S. Dollar-Indexed Philippine Peso Notes (i.e., the notes or
instruments to be issued are indexed or benchmarked against
the U.S. dollar), the investor may end up incurring a loss—
instead of making a gain—especially if the Philippine peso
appreciates versus the U.S. dollar.
Interest•bearing As to the manner of the payment of interest or yield,
bonds vs. there are two kinds of bonds: the interest-bearing bond and
discounted bonds the discounted bond. Both of them pay a fixed amount or a
fixed rate of interest over the life of the debt instrument, hence
the name "fixed income security."
time of withholding Bonds are issued in the primary market at face value.
If the bonds are issued to 20 or more lenders and are in the
nature of deposit substitutes, the interest paid by the issuer is
subject to withholding tax at varying rates depending on the
status of the income recipient (see section on withholding tax
in this chapter). The issuer is required to withhold the tax at
every interest payment. For interest-bearing bonds, it is
periodically as stated in the instrument.
In the case of zero-coupon bonds, more specifically
government-issued bonds, the interest (in the form of discount)
42 Chapter II
is deemed to be received by the holder up-front upon purchase of
the bond and not upon maturity. Thus, the issuer is required to
withhold the tax on the discount upon issuance of the bond.
Considering, however, that the discount represents the interest
earnings over the life of the instrument (for example, a period of
five or ten years), the basis of the withholding tax shall be the
present value of the discount (BIR Ruling No. 050-01, October
29, 2001). Note that in the case of zero-coupon bonds, the
withholding tax on interest can be imposed only from the primary
market or origination but not from the secondary market
This principle of withholding the tax on the discount
up-front and using its present value at the time of purchase in
the primary market was introduced under BIR Ruling Nos. 177-
95 (November 9, 1995) and 050-01 (October 29, 2001) in
connection with the issuance of dollar-denominated
government bonds. Although it is very logical, it may run
counter with the basic principles and rules of withholding as
laid down under RR 02-98.
Under RR 02-98, the obligation of the payor of the
income to deduct and withhold the tax arises at the time the
income is paid, is payable, or when accrued as an expense or
asset (and the same is claimed as a tax deduction against the
payor's taxable income), whichever comes first. In the case of
zero-coupon bonds, the interest income is actually paid only at
the end of its maturity upon redemption, at which time it
becomes legally payable. However, since the amount of
discount is being amortized over the life of the instrument and
is recorded as an accrued interest expense claimed by the issuer
as a deduction from taxable income, the tax required to be
withheld should be made at this point.
The obligation of the issuer to withhold the tax arises
in the last month of the return period in which the same is
claimed as an expense or amortized for tax purposes (RR 02-
98). For example, a P6 million discount from a two-year zero-
coupon bond with a face value of Pioo million, may be
Banks 43
amortized for two years, and the amortized portion of the
discount, which is P250,000 per month (P6 million divided by
24 months) or P75o,o0o per quarter may be claimed as a
deduction in the quarterly income tax returns. Thus, since the
discount is not yet paid or payable, but an aliquot portion of it
is already claimed as a deduction from taxable income, then
that amount claimed as deduction is already subject to
withholding. If the amortized discount is claimed in the first
quarter income tax return ending March, the obligation to
withhold on the P750,000 (which is the total amount claimed
as deduction in the tax return) is in March and the amount
withheld is required to be remitted within the tenth day of the
following month in accordance with the regular rules for
and remittance of withholding taxes.
The inconsistencies in RR 02-98 and BIR Ruling Nos.
177-95 and 050-01 may be harmonized by applying the rule,
which is more of general application, that is, RR 02-98. The
rule laid down by BIR Ruling No. 050-01 on withholding with
respect to discount on zero-coupon bonds, having been famed
in relation to dollar-denominated government bonds, may
apply only to bonds with the same nature (i.e., government-
issued bonds).
Trading of bonds When bonds are traded in the secondary market, a
trading gain or loss may be realized. In the case of interest-
bearing instruments, the gain is determined as the difference
of the selling price in the secondary market and the pries at
which the same bonds are purchased, either from origination
or from the secondary market after taking into consideration
the interest accruing to the seller if the bond is sold in between
payment dates.
determination of gain The "accrued interest" component paid by the buyer to
the holder-seller (and which the buyer eventually receives from
the issuer) is taxed to the seller as an interest income (or interest
expense to the buyer), subject to the rules applicable to interest

44 Chapter II
income. The gain, which is the other component of the
difference, is a trading gain subject to the rules applicable to
trading gains (see discussion of tax treatment of interest vis-à-
vis trading gain).
If, for example, the holder-seller is a corporation and
the bond is with a maturity of more than five years, the interest
component is subject to tax while the trading gain is exempt.
For purposes of claiming exemption under Section 32(g) of the
Tax Code referring to exemption of trading gains, the interest
income should be separately recorded from the trading gain.
For zero-coupon bonds, or discounted bonds, the gain
from secondary trading is determined as the excess of the selling
price over the par value or book value of the instrument (par
value consists of the original purchase price plus the
accumulated discount from the time of purchase up to the time
of sale). In the case of secondary trading of zero-coupon
government bonds, the interest income component is no longer
subject to withholding tax since the full amount of interest is
already subjected to tax at origination, either periodically or
upfront in the case otgovemment-issued bonds.
Government bonds As mentioned, the 2o-lender rule does not apply to
government bonds and issuances. In BIR Ruling No. 007-04
(July 16, 2004), the BIR took the position that the issuance of
government debt instruments and securities falls within the
coverage of deposit substitutes, irrespective of the number of
lenders at the time of origination, that is, at the time of original
issuance.
20-lender rule not Prior to this ruling, the BIR applied the 2o-lender rule
applicable to to government bonds and other issuances. This sudden change
government.bonds in position is based on the rationale that government bonds
are intended to generate the required funding for the
government from the public. The issuance and subsequent
distribution (exchange and trading) of government debt
Banks 45
instruments and securities in the secondary market to other
market participants, specifically the investors, is in itself a
public borrowing of the government. The financial assets in
the hands of the investors represent a claim to future cash for
which the borrowing entity must pay at maturity date. Thus,
with respect to government bonds and issuances, the term
public is construed as referring to the direct investors or lenders
at the time of origination or original issue and the indirect
investors in the secondary market where the securities are
exchanged and traded.
This position was later reiterated in BIR Ruling No. DA-
491-04 (September 13, 2004), which confirmed that the fixed
rate promissory notes (PNs) issued by the Bureau of Treasury
are deposit substitutes notwithstanding that these are issued
to only one corporate or institutional lender and that the holder
is not allowed to trade or sell the PN in the secondary market
to more than one corporate or institutional buyer, or that,
should the holder opt to-sell its participation in the PN, it shall
be required to sell its entire participation in the PN.
To clarify its-position, the BIR, through BIR Ruling No.
DA-491-04, reinstated the applicable provisions of RR 17 -84
(October 12, 1984) by specifically including within the meaning
of deposit substitute the following:
1. In the case of other nonfinancial companies,
including the national or local government and
its instrumentalities, all borrowings through the
issuance of debt instruments denoted as
treasury bonds, treasury bills, treasury notes,
and similar arrangements
2. All borrowings of the national and local
government and its instrumentalities including
the BSP, evidenced by debt instruments
denoted as bills, notes, certificates of
indebtedness and-similar instruments

46 Chapter II
Note that (1) above refers to non-financial companies.
These include private companies not classified as financial
institutions that may issue debt instruments or debt
arrangements denoted as treasury bonds, treasury bills,
treasury notes, and similar arrangements.
To conform to the position that the 20-lender rule does
not apply, the BIR likewise issued an opinion that the phrase
"at any one lime" in the case of government securities and
"at any one time"
issuances refers to the whole duration of the flotation (that is,
the act of raising the financing requirements) of the debt
instruments or securities. This is contrary to the general rule
that considers "at any one time" to be at the time of origination
only. The.BIR reasoned out that it would be quite an awkward
task for both the issuer and the BIR to aggregate the number of
lenders or investors in every issuance of government securities
since there can be more than one instance of issuance at the
level of origination and in subsequent distribution (exchange
and trading) in the secondary market.
In light of all these changes, the BIR issued Ruling No.
08-05 (July 28, 2005), clarifying that government securities issued
prior to BIR Ruling No. 07-04 (July i6, 2004) shall nevertheless
be covered by the 20-lender rule. Hence, tax withheld on interest
income from government securities issued to less than 20 lenders
during that time may be applied for refund within the two-year
prescriptive period and subject to the rules and procedures
governing the applications for refund. However, although the
interest income is exempt from withholding, it is still subject to
the regular income tax as part of the taxable income of the recipient,
unless otherwise exempt from tax.
Note that the above rules specifically apply to
government bonds, notes and other issuances only. As regards
other financial instruments issued by financial institutions, the
general rules pertainingto the 2o-lender rule so as to constitute
as an issuance to the public and "at any one time" referring
only to the time of origination or primary issuance will apply.
Banks 47
Government bonds There are governmentissuances of dollar-denominated
and instruments with Republic of the Philippines (ROP) bonds with tax-free interest
tax-free interest clause contained under a Tax Clause provision with this tenor:
provisions "all payments in respect of the Treasury Bonds and Coupons
shall be made free and clear of, without withholding or
deduction for any taxes, duties, assessments or governmental
charges of whatever nature imposed by the government."
The government's guaranty to pay the interest free of
any tax entitles the holder of the instrument to receive the
agreed interest without any deduction for the tax required to
be withheld by the government on deposit substitute. it does
not mean, however, that the interest income in itself is exempt
from tax. There is no law or regulation providing for the tax
exemption of interest income derived from any government
bond or instrument, be it issued in peso or in foreign currency.
The tax required to be withheld and remitted to the government
is still due and payable to the BIR but to be borne by the
government.
Thus, notwithstanding the presence of a tax exemption
clause in government bonds issuances, the interest payments
are still subject to the applicable income and withholding, Nees,
but the tax is borne by the issuer (in this case, the government)
and not deducted from the agreed amount of interest payable
to the holder of the bond.
The same rules applyto dollar-denominated bonds. See
discussion on dollar-denominated treasury notes in the section
on taxation of OBUs and EFCDUs in this chapter.
Tax-free covenant In the case of bonds, mortgages, deeds of trust or ether
bonds similar obligations of domestic or resident foreign corporations
containing a contract or provision under which the issuer agftes
to pay any portion of the tax imposed upon the investor or to
reimburse the lender for any portion of the tax, the issuer is
required to withhold a tax equal to 30% of the interest or ether
I 48 Chapter II Banks 49
payments, if the interest is payable to a nonresident alien or to
a citizen or resident of the Philippines (Section 57, Tax Code).
As the provision is worded, its application is limited
only to securities issued by domestic or resident foreign
corporations. Those issued by the government are not covered
by the provision. It is also not clear why a withholding tax rate
of 30% is imposed when the agreement provides for a tax
assumption or restitution by the issuer.
IBCL AND The BSP requires banks to maintain a daily minimum
REPURCHASE cash reserve set as a proportion of their deposit liabilities. This
AGREEMENTS requirement is aimed at protecting the depositors and
promoting the stability of the banking system.
On a daily basis, banks are required to meet this
minimum requirement. Some banks may be holding on to a
reserve surplus in a day, while others have deficiency in
reserves. There are also cases when some banks are in a surplus
in one day but deficient in some other days. To cover temporary
deficits, banks normally borrow (usually on an overnight
lending) from other banks with surpluses. This network that
allows banks that are deficient in reserves to borrow from banks
with surplus reserves is called interbank call loans (IBCLs, or
overnight loans among banks). By availing of IBCLs, reserve-
deficient banks are able to avoid BSP, sanctions and-reserve-
surplus banks are able to earn income on their excess cash
holdings (Saldafia, 1997).
A repurchase agreement, on the other hand, is a contract
to sell a security for a fixed price with an agreement that the seller
shall repurchase the same security at a fixed price on a fixed future
date. The repurchase agreement (or repo contract) assures the
buyer that the issuer holds an underlying security. The underlying
security, in this case, is that instrument previously issued by the
government or a private corporation. If it is warranted, the issuer
can sell the security to repay the loan (Saldafia,1997; see also BSP
Manual of Accounts).
Most repos are overnight transactions, with the sale
taking place one day and being reversed the next day. Longer
repos, called term repos, can, however, extend for a much
longer period of time.
A reverse repurchase agreement (reverse repo) is a term
used to describe the opposite side of a repo transaction. The
party who sells and later repurchases a security is said to
perform a repo. The other party—the one who purchases and
later resells the security—is said to have undertaken a reverse
repo. As may be inferred from this description, a repo and a
reverse repo are analogous transactions (Contingency Analysis,
1996; Trivedi and Hasan, 2000; and BSP Manual of Accounts).
Taxation of IBCLs Repurchase agreements and reverse repurchase
and repurchase agreements are considered deposit substitutes [Section 22(Y),
agreements Tax Code]. Thus, the interest income, as well as any gain
derived from such agreements, is subject to taxes applicable to
a deposit substitute (please refer to discussion on deposit
substitutes).
IBCLs with a maturity period of not more than five days
and used to cover deficiency in reserves against deposit
liabilities, including those between or among banks and quasi-
banks, are not considered deposit substitutes [Section 22(Y),
Tax Code]. If an IBCL exceeds five days, it shall be treated as a
deposit substitute.
IBCLs and repurchase agreements are likewise not
subject to DST except in the case of an IBCL with a maturity of
more than seven days. Also, note the difference of maturity
dates required: for exemption from the final tax as a deposit
substitute, the maturity date should not be more than five days;

50 Chapter II
for exemption from DST, the maturity date should not be more
than seven days.
INDIVIDUAL TRUST In general, a trust fund is an amount, of money or
FUNDS, COMMON property administered by an individual or an organization for
TRUST FUNDS AND the benefit of the grantor (the person who created the fund) or
INVESTMENT another individual or organization. The trustor is the person
MANAGEMENT who establishes the trust; the trustee is the person or
ACCOUNTS organization in charge of the fund; the beneficiary is the person
or group of persons for whose benefit the fund is created
(Mogan & Gardner, 1973).
trust A trust fund may be established to provide income for
beneficiaries during the life or after the death of the grantor, to
benefit a charitable organization, to increase the value of a
property by placing it in the hands of a competent trustee, or to
protect the trust property especially when the beneficiary is still
a minor.
The primary duties of the trustees are to invest the
principal of the fund and to distribute its benefits to the
designated beneficiaries of the trust. Although any competent
person may be appointed as trustee of a trust fund, most trust
services are contracted with trust companies or banks with trust
departments (Mogan & Gardner, 1973). It is in this light that a
bank becomes an important player in the implementation of
the taxation of a trust arrangement.
common trust fund A common trust fund (CTF), as the term implies, is a
fund built along the concept of a trust fund. However, unlike
an ordinary or individual trust fund (ITF) that is generally
created or put up by a single individual (the grantor), the CTF
is put up by a number of individuals or investors to gain access
to higher yielding investment instruments and achieve
investment diversification.
Banks 51 11
In other words, while the primal objective in setting up
a trust fund is to provide a stream or assurance of income to a
designated beneficiary specially in cases of contingencies or
when the grantor or creator of the trust is no longer around, in
a common trust fund, the overriding consideration in a CTF is
to derive access to higher-yielding investment instruments.
Thus, a CTF is more of an investment instrument than a
contingency response. For this reason, a CTF is a fund
maintained exclusively for the collective investment and
reinvestment of money contributed by the trust customers,
generally referred to as participants or investors in investment
outlets not commonly available to them.
investment An investment management account (IMA), on the
management account other hand, does not result in a trust relationship. It operates
largely as an investment instrument whereby the bank, as an
investment manager, manages the investible'funda in a
representative capacity either as a financial or managing agent,
adviser, consultant or administrator. The agreement results
in a principal-agent relationship, not trusteeship. The
investments are in the name of the principal or the investment
manager as agent of the principal.
Just like a CTF, investors usually resort to IMAs to gain
access to higher yielding investment instruments and achieve
investment diversification. An IMA is a portfolio of investments
managed by a reputable and competent investment group,
including banks. Investors in IMAbenefit from the knowledge,
competence and experience of professional research analysts
and investment managers who actively manage the portfolio
of investments by themselves and make day-to-day investment
decisions based on the objectives of the concerned investors.
A managed account is a portfolio of varying investments
chosen by a professional investment manager to achieve a
particular objective such as long-term growth or income. Each
of the managed accounts is owned by an investor for whom it
is managed. Thus, a managed account is a scheme whereby an
52 Chapter II
investor is able to benefit from the professional expertise or
acumen of an investment manager.
Given that an ITF, CTF and IMA generate a stream of
income to their beneficiaries or investors, banks play a crucial
role in the collection and payment of the taxes due on the
income of an ITF, CTF or an IMA under its management or in
which it acts as trustee.
Taxation of the The fees (such as trust fees or service fees) received by
income of the bank a bank as trustor or manager of an ITF, CTF or IMA are part of
from the ITF, CIF or its gross income, which shall be lumped together with other
IMA income from operations and shall be subject to the 35% income
tax based on net. It is also subject to the gross receipts tax
(GRT) at 7%. (See discussion on GRT in this chapter.)
Taxation of the There are two kinds of trust: an irrevocable trust and a
income of the ITF, revocable trust.
CIF or IMA
For tax purposes, an irrevocable trust is treated as a
separate taxable entity and is taxed in the same manner as an
individual. In the case of an irrevocable trust, the trustor is
required to declare the taxable income and file a separate tax
return for the trust.
revocable vs. irrevocable A revocable trust, on the other hand, is only a pass-
trust through entity and is not, for tax purposes, separate from the
owner-trustor (or trustors in the case of CTF). Thus, the income
of a revocable trust is taxed to the owner-trustor and is to be
included in its taxable income. Similarly, income from an IMA
is an income of the principal (owner of the fund under
management), which shall be included in its taxable income.
Being so, the income of ITF, CTF or IMA follows the
tax rules applicable to the trustor individuals or corporations.
For example, interest income received by an ITF, CTF or IMA
Banks 53
(which eventually flows to the owner of the trust or fund) is
subject to a 20% (or the applicable rate) withholding tax unless
it arises from a long-term deposit or investment, in which case,
it may be exempt from tax. (See also discussion on taxation of
income from long-term deposits.)
income fax exemption The exemption from tax on the interest income received
on interest income by an ITF, CTF and IMA can be availed of only if it conforms to
the following:
i. The fund is deposited or invested in the form
of savings, ITF, CTF, IMA, deposit substitute
or any other investment for a period of not less
than five years.
2. The grantor or principal is a citizen or a resident
or nonresident alien engaged in buginess in the
Philippines.
3. The grantor or principal is an individual and
not a corporation.
4. The investment is made with banks.
The tax exemption applies to the income of the trust
and not to the trust itself. Hence, the other income of the trust
that is not exempt (such as dividend income, interest income
not arising from long-term investments, and other
miscellaneous income) shall still be subject to tax in accordance
with the rules applicable to the individual or corporate
recipients, as the case may be.
In a ruling released recently (BIR Ruling No. 03-05,
July 22, 2005), the BIR clarified that the tax exemption applies
to the interest income and not to the trust per se. The CTF, ITF
or IMA. is still subject to the applicable tax on its other income
such as gain from sale of securities, or on sale of shares of stocks
(5% and 10% for unlisted, or 1/2 of i% for listed and traded,
54 Chapter II
DST, or the 10% dividend tax) when investments made by the
fund give rise to these incomes.
Counting of the five- As already mentioned, the exemption from the 2o% (or
year holding period the applicable rate) FWT applies only to interest on long-term
deposits or investments with a maturity of not less than five
years made with banks in the form of savings, ITF, CTF, IMA
or deposit substitutes. In case of pretermination of the deposit
or investment, the interest income is subject to a three-tiered
graduated rate of withholding tax based on the remaining
maturity of the instrument as follows: (1) if the remaining
maturity of the instrument is four years to less than five years,
the tax to be withheld is 5%; (2) or if three years to less than
four years, it is 12%; and (3) if less than three years, it is 20%.
In the case of ITF, CTF and IMA, the required five-year
holding period is counted from the time the money is placed in
a trust (either ITF or CTF) or in an IMA with a bank. Thus, as
long as a trust or fund is held by a bank for at least five years,
regardless of the term of the investment or maturity of the
instrument in which it is subsequently invested, the interest
income of the trust is exempt from income tax and,
consequently, from the required withholding tax.
As confirmed by the BIR in several rulings, the interest
income earned from such long-term deposit or investment in
the form of ITF, CTF or IMA is still exempt from income tax
even if it is subsequently invested by the bank in short-term
instruments. For as long as the holding or maturity period of
the individual's ITF, CTF or IMA is not less than five years as
indicated in the certificate of trust instrument, the exemption
applies [BIR Ruling Nos. DA-012-02 (January 3o, 2002), 030-
01 (July 24, 2001), DA-o64-o2 (April 3, 2002), 63-2000,
(November 20, 2000)].
In a recent ruling (BIR Ruling No. 003-05, July 22,
2005), however, the BIR ruled that for purposes of counting
Banks 55
the-hOlding period, both the funds in the trust and the
underlying instrument in which the trust was invested must
comply with the five-year holding period. It is required that,
for the exemption to apply, the fund must be deposited in the
trust for not less than five years and at the same time the trust
fund must be invested in instruments with a maturity of not
less than five years. This ruling contradicts all prior rulings
issued on the matter.
It must be noted, however, that what is required under
the law [(Sections 24(B)(1) and 25(A)(2), Tax Code] is for the
funds to be invested in long-term investments in the form of
savings, ITF, CTF, IMA, deposit substitutes or other
investments. Thus, the mere fact that the fund is invested in
an ITF, CTF or IMA and stays there for not less than five years,
it is already considered a long-term investment; therefore, any
interest income derived by the trust from the underlying
instruments (whether long-term or short-term) in which the
trust funds are invested should be exempt from income tax end
from the required withholding tax.
As quoted from Congressman Margarito Teves during
the deliberations of the Congressional Bicameral Conference
Committee, the purpose of this provision is to encourage Myers
to put their long-term savings in financial institutions. The
act of depositing or investing in a bank in the form of an 117, a
CTF or an IMA for long-term (not less than five years) is
sufficient to satisfy the requirement of the law for income tax
exemption.
Again, the exemption holds true only if the trustee or
investee is a bank. If the trustee is an NBFI or a financing or
insurance company, the exemption does not apply unless the
fund is subsequently invested with a bank in the form of deposit
or investment instruments and the instrument qualifies for tax
exemption.
56 Chapter II
Monitoring To be able to implement and monitor the tax exemption
requirements of BSP of long-term deposits or investments, banks are mandated to
set up a separate monitoring system in their trust books relative
to their long-term products. The banks' trust departments or
investment management departments are required to maintain
separate ledger accounts and other relevant sub-accounts for
tax-exempt individuals' ITF, CTF or IMA and to adopt
appropriate systems, internal control procedures and audit trail
mechanisms to ensure that the correct amount of final tax is
withheld or exempted.
With respect to tax-exempt ITF, CTF or IMA, the bank
shall be responsible for obtaining the tax exemption
certifications that may be required by the BIR for the interest-
bearing instruments where the funds will be invested. (Refer
also to Monetary Board Resolution No. 1748, December to,
1999, as amended by Memorandum to All Banks Performing
Trust and Other Fiduciary Business and Investment
Management Activities, January 3, 2000, re: duties and
responsibilities of a bank's trust or investment management
department relative to the tax aspects of such accounts.)
BIR Certificate of BIR Ruling No. DA-012-02 (January 3o, 2002)
Exemption provides that the issuance of a tax exemption certificate by the
BIR is no longer necessary for purposes of claiming the above
exemption from income tax on interest income from long-term
deposits or investments.
Distribution of Considering that the trust (in the case of revocable
income to the trustor trusts) is one and the same taxable entity as that of the trustor,
and that the trustee-bank acts only as administrator of the
funds, the eventual distribution of the income of the ITF, CTF
or IMA to the trustor or principal is not a taxable event and is
therefore exempt from income tax. The net gains or dividends
are no longer subject to the 2o% FWT (or the applicable rate)
when subsequently distributed to the investors (individual or
Banks 57
corporate) in the ITF, CTF and IMA (BIR Ruling No. 03-05,
July 22, 2005).
Obligation to The obligation to withhold any tax (unless exempt) from
withhold the tax the income of the ITF, CTF or IMA rests on the company or
entity in whom the funds are invested and not with the trustee
bank, unless the bank itself is the investee. Thus, if the income
of the trust is not exempt (i.e., the maturity of the instrument
is not long-term), the tax required to be withheld on the interest
income of the ITF, CTF or IMA shall be withheld by the investee
corporation. Likewise, the 10% tax required to be withheld on
dividend income that may be earned by the trust from its
investments shall be withheld by the investee corporation and
not by the bank. ,
In BIR Ruling No. DA-201-04 (April 12, 200'4), the BIR
ruled that when funds from trust funds are invested in various
investment forms such as loans to the top ten thousand
2% CWT if investee corporations (TTCs), the interest payment made by the BIR-
is a TTC designated TTC for its loans funded by trust funds administered
by a bank is not subject to the 2% CWT. This reason is anchored
on the argumentthat since the interest payments will be subject
to 2o% withholding tax later on when the trustee bank
distributes the income to the trustor, then the provision of RR
17-03 requiring a 2% withholding tax will not apply since there
would be double withholding.
The reason cited in this ruling for the exemption of the
income from 2% withholding tax is flawed. As earlier
mentioned, the distribution of the income of the trust to the
trustor is not a taxable event and not subject to withholding
tax. The obligation to withhold rests on the investee corporation
and not on the bank, unless of course the bank itself is the
investee (i.e., funds are invested in the bank's own investment
products). Thus, it is more appropriate to say that the interest
income of the trust is subject to a 2% withholding tax only if
the investee belongs to the TrCs unless the same income is
58 Chapter II Banks 59
subject to another rate of withholding tax such as the 20% (or
applicable rate) withholding tax on interest income from
deposit substitutes.
The 20% withholding tax on interest income is required
only on interest received from currency bank deposits, deposit
substitutes, trust funds and similar arrangements [Sections
24(B)(1) and 27(D)(1), Tax Code; see also section on
withholding tax in this chapter]. The 2% withholding tax
required from payments of ITCs on their purchase of services
(interest income, if received by a financial intermediary, is an
income from the sale of service) applies only if the income is
not subject to any other specific rate of withholding tax. Thus,
if the interest income is required to be subject to a 20%
withholding tax, for example, or is exempt from income tax
(e.g., interest income from long-term deposits by an individual),
the 2% withholding tax does not apply.
As a matter of practice, however, banks have taken the
responsibility of withholding the tax required to be withheld
by the investee corporation on the interest income received by
the trust, in cases where the investee failed to withhold for
whatever reason. This is to avoid any liability for penalties that
may be imposed on them or on their trust-clients by the BIR
later on. In one case, the CTA opined that failure of a payor to
subject an income to withholding tax where one is required
does not exempt or relieve the recipient of the income from its
obligation to pay the tax.
In the case of retirement funds and provident funds
placed in trust with banks, the banks, as administrators of the
fund, are liable to withhold the applicable tax, if any, relative
to the disbursement of separation benefits or other employee
benefits to separated employees. Pursuant to RR 30-03, the
corresponding withholding taxes are to be withheld by the
person having control over the payment, in this case, the trustee
bank (BIR Ruling No. DA-321-04, June ii, 2004).
DERIVATIVES A derivative is a financial instrument whose valise is
dependent on the value of its underlying asset. It serves to
capture, in the form of price changes, underlying price changes,
events, or risks. In other words, a derivative is generally used
as a means to hedge and manage risk. It is a security whose
value is determined (derived) from one or more other securities,
commodities or events. This value is, in turn, determined by
the features of the derivative contract, which may include the
timing of the fulfillment of the contract, the value of the
underlying security or commodity, and other factors such as
volatility. Some examples of derivatives are futures, forwards,
options and swaps, and these may even be combined with each
other or with traditional securities or loans to create hybrid
financial instruments like swaptions (Financial Policy Foram-
Derivatives Study Center and Financial Express, 2002).
Afidures contract is an agreement to purchise or sell a
commodity for delivery in the future. Aforward contract, on
the other hand, is normally a cash transaction where a buyer
and seller agree in advance on the price of a specified quality
and quantity of goods to be delivered at a specified time in the
future. An option is a contract giving the buyer the right, not
necessarily the obligation, to buy or sell a specified quantity of
a commodity or other instrument at a specific price witain a
specified period of time, regardless of the market price of that
instrument.
A swap is the exchange of one asset or liability for a
similar asset or liability to lengthen or shorten maturities, raise
or lower coupon rates, maximize revenues, or minimise
financing costs. A swaption is an option to enter into a swePt
that is, the right, but not the obligation, to enter into a spec
type of swap at a specified future date (Commodity Futures
Trading Commission's Office of External Affairs, 2005).
Gain as ordinary Any gain arising from a derivative transaction is an
income ordinary income, while losses are considered ordinary losses
60 Chapter II
allowed as deduction from taxable income. Gains are reported
for income tax purposes only when these are actually realized.
In short, income or loss from a derivative transaction is taxable
or deductible only when the derivative transaction is
consummated from a closed and completed transaction.
Movements of the market resulting in "mark to market" profits
and losses do not have any tax impact. Following basic taxation
principles, more particularly the "closed and completed
transaction" and the "realization rule" for recognition of taxable
income, liability to income tax arises only when the income is
actually realized. Similarly, a claim for deduction for losses is
ripe only if the loss is actual and the transaction is completed.
Individuals and corporations who realize gains from
their investment in derivatives, being in the nature of an
ordinary income, are reqUired to report such gains or claim
such losses, as the case may be, in their income tax returns,
which will be subject to a 35% income tax based on net.
In BIR International Tax Affairs Division (ITAD) Ruling
No. 159-03 (October 20, 2003), the BIR confirmed that income
from derivatives (e.g., interest rate and currency swaps) is
ordinary income subject to the regular income tax and is not
considered interest income subject to an FWT at applicable
rates depending on the recipient.
The income received is a Philippine-source income—a
business profit and not an interest income—and is therefore
exempt from Philippine income tax and withholding tax if the
recipient of the income is a nonresident foreign corporation
without a permanent establishment and is a resident of a
country with which the Philippines has a tax treaty. (For GRT
purposes, the basis of GRT is net gains. See GRT discussion.)
SPECIAL PURPOSE RA 9182 (December 23, 2002), also known as the
VEHICLE ACT Special Purpose Vehicle (SPV) Act of 2002, was enacted to give
Banks 61
certain tax incentives to banks when disposing of their
nonperforming assets (NPAs) to improve their liquidity. A
bank's NPAs refer to its combined level of nonperforming loans
(NPLs) and ROPOA.
To achieve this, the SPV law exempts from tax the
tax exemptions transfer of NPAs from and to the following: (1) the financial
institution (an FI, the BSP, a bank, a financing company, an
investment house, certain government financial institutions,
certain government corporations and other institutions licensed
by the BSP to perform QB functions) to an SPV; (2) from an
SPV to a third party; and (3) dation in payment (dacion en
pago) by the borrower or by a third party in favor of an FI or in
favor of an SPV.
The exemption on the above transfers of NPAs covers
the following taxes: (1) documentary stamp tax (DST), (2) CGT,
(3) creditable withholding income taxes on transfers of
properties treated as ordinary assets, and (4) VAT or GRT.
Additionally, the foregoing transfers are liable only to 5o% of
the applicable mortgage registration and transfer fees, filing
fees and land registration fees.
To further encourage the SPV to infuse capital or
financial assistance to rehabilitate the borrower's business, said
SPV is granted exemption from income tax on interest income
derived from such transactions with the borrower, from DST
and from mortgage registration fees.
RA 9182 was effective only up to September 19, 2004.
Inasmuch as there are many problems in the disposition of
NPAs under the SPV Law, only a small number of banks availed
of the provisions of RA 9182. RA 9343 was signed into law on
April 24, 2006, extending the deadline for the establishment
of an SPV from September 19, 2004, to 18 months after the
effectivity of the new law.
62 Chapter II Banks 63 I I

SECURITIZATION Under RA 9267 (the Securitization Act, March 19, Taxation of Offshore Banking Units and
ACT 2004), loans or receivables of a bank may be transferred in Expanded Foreign Currency Deposit Units
favor of a special purpose entity (SPE), which would then issue
asset-backed securities (ABS) to the bank. The payment of the
ABS will depend on the cash flow from the assets sold by the
SPE and in accordance with the securitization plan as approved Nature of OBUs and EFCDUs
by the SEC. To encourage the transfer of the assets, RA. 9267
exempts such transfers from VAT and DST. Moreover, with
the exception of registration fees payable to the SEC, the Offshore banking is the conduct of banking transactions
transaction transferring the assets under RA 9267 is liable only in foreign currencies, including the receipt of funds principally
to the extent of 5o% of the applicable registration and from external sources and the utilization of such funds, subject
annotation fees. Furthermore, the transfer of assets by dation to certain conditions (PD 1034, September 3o, 1976).
in payment by the obligor in favor of an SPE is not subject to
capital gains tax. An OBU is a branch, subsidiary or affiliate of a deign

Quite obviously, the purpose of the law is to make the

assets more productive and to yield more benefits to the seller
in particular, and to the economy in general. Given that RA
9267 is a recent law, it may be premature to pass judgment on
its benefits to the banking sector as regards the handling of
banking corporation that is duly authorized by the BSP to
transact offshore banking business in the Philippines in
accordance with PD 1034 as implemented by Central Bank (now
the BSP) Circular No. 1389, as amended [RR 10-98 (August
25, 1998); PD 1034•
it
risk on loans, receivables and other debt instruments. On the other hand, an FCDU and expanded foreign
currency deposit unit (EFCDU) pertain to a unit or department
of a local bank or a local branch of a foreign bank authorised by
the BSP to engage in foreign currency-denomineted
transactions pursuant to the provisions of RA 6426, as
amended. The term "local bank" refers to a commercial hank,
universal bank, and a thrift bank organized under the laws of
the Philippines (RR 10-98).

FCDU vs. EFCDU The license to operate an EFCDU, however, is limited

only to commercial banks and universal banks. A bank with
an EFCDU license can practically engage in the same
transactions as that of an FCDU but with an expanded 1
operation. Unlike the FCDU whose license is limited to sh ►rt-
term deposits and loans, an EFCDU is allowed to deposit, invest
or grant loans in long-term foreign currency-denominated
transactions. Note that only EFCDUs are covered by the tax
exemptions granted under the Tax Code, as amended by RA
9294. (See further discussion below.)
64 Chapter II
A bank that is granted a license to operate an FCDU is
authorized to engage in the following transactions in any
acceptable foreign currency:
1. Accept deposits and trust accounts from
residents and nonresidents
2. Deposit on short-term maturity with foreign
banks abroad, OBUs and other FCDUs and
EFCDUs
3. Invest in foreign currency-denominated debt
instruments that are of short-term maturity and
are readily marketable
4. Grant short-term foreign currency loans as may
be allowed by BSP regulations
5. Borrow, on short-term maturity, from other
FCDUs/EFCDUs, from foreign banks abroad,
and from OBUs subject to existing rules on
foreign borrowing
6. Engage in foreign currency swap with the BSP,
OBUs and other FCDUs/EFCDUs
7. Engage in securities lending activities as lender
8. Engage in repurchase agreements involving
foreign currency-denominated government
securities
A bank with an EFCDU license can engage in the same
transactions allowed to an FCDU and can also do the following
transactions:
1. Foreign exchange trading and, with prior
approval of the BSP, engage in financial futures
and options trading
2. Upon request/instructions of its foreign
correspondent bank, it can: (a) issue letters of
credit for nonresident importers in favor of a
nonresident exporter; (b) pay, accept or
negotiate draft/bills of exchange drawn under
letters of credit; (c) make payment to the order
of a nonresident exporter
Banks 65
3. Direct purchase of export bills of resident
exporters subject to certain conditions
4. Securities lending activities subject to certain
conditions
5. Repurchase agreements involving foreign
currency-denominated government securities
Background on the taxation of OBUs and EFCDUs
In consideration of the country's desire to be in the
mainstream of global and regional financial intermediation, PD
1034 (September 30,1976) and PD 1035 (September 3o, 1976)
granted a broad-based tax exemption to OBUs and EFCDUs.
The enactment of RA 8424, however, took away the sweeping
provision of tax exemption given to OBUs and EFCDUs and
subjected all of their income, including interest income from
foreign currency transactions with nonresidents, to a final tax
of 10% based on the amount of such income [Sections 27(D)(3)
and 28 (A)(4), Tax Code).
Considering, however, the original thrust to project the
Philippines as a principal player in the realm of global or
regional financial intermediation, the government has restored
the provision of the broad-based tax privilege previously
enjoyed by OBUs and EFCDUs under RA 9294 (April 28, 2004).
The restoration notwithstanding, a number of issues
still persist in the taxation of OBUs and EFCDUs, which, if not
resolved, may negatively affect the country's efforts to make
itself a key player in global and regional financial
intermediation. The most unsettling of these issues pertains
to the tax obligations of the OBUs/EFCDUs to GRT and DST
during that period when RA 8424 was in effect. Most OBUs
and FCDUs/EFCDUs have been assessed by the BIR for
deficiency taxes involving substantial amounts that remain
unsettled up to this time. Some of these assessments are now
82 Chapter II Banks 83
3. If the holder is a nonresident foreign corporation:
35% final tax based on gross income, unless
transacted with depository banks under the
EFCDU or with OBU, in which case, it is exempt
4. If the holder is a resident individual or a
nonresident alien engaged in trade or business
in the Philippines: 5% - 32% based on net income
5. If the holder is a nonresident individual not
engaged in trade or business in the Philippines:
25% based on gross income (BIR Ruling No. oso-
oi), unless transacted with depository banks
under the EFCDU or-with OBU, in which case, it
is exempt
6. If the gain arises from trading and redemption of
securities with a maturity of more than five years:
exempt
In all instances where withholding of the tax is required,
the issuer shall be constituted as the withholding agent and shall
be responsible for remitting the tax withheld to the BIR. In case
the recipient of the income is a resident of a country with which
the Philippines has a tax treaty, the provisions of the applicable
tax treaty shall prevail.
Restoration of exemptions by RA 9294
The amendment introduced by BA 9294 is substantially
the same as the provision on the taxation of income derived from
the expanded foreign currency deposit system prior to RA 8424.
As worded in the title of the law itself, RA 9294 is intended to
restore the tax exemption of OBUs and FCDUs prior to RA 8424.
The word "restoring" has been the subject of different
interpretations. Some say "restore" means to resurrect something
that has been lost, while others say "restore" means to bring back
something into the present without interruption. The
interpretation of the word "restore" in relation to the legislative
intent of the law is important in determining whether the
provisions of RA 9294 apply even to transactions under RA 8424
when the tax exemptions were withdrawn. The big question is:
has the restoration of the same tax exemption by RA 9294 indent
restored without interruption the exemptions granted under PA
1035, covering even those periods under RA 8424 when molt tax
exemptions were withdrawn?
While the law may be clear as to its effectivity (May 21,
2004), there are arguments to support that the amendatory
provisions under RA 9294 restoring the tax exemptions may
retroact even during the period covered by RA 8424 from Jemmy
1, 1998 up to May 20, 2004. There is a general rule of law that
where a statute is repealed and all or some of its provisions are at
the same time re-enacted, the re-enactment is considered a
reaffirmation of the old law, and a neutralization of the repeal, so
that the provisions of the repealed act, which are thus re-ematted,
continue in force without interruption, including all rights and
liabilities thereunder.
Similarly, the rule of construction is that, when a revised
and consolidated act re-enacts, in the same or subotantialy the
same terms, the revision and consolidation shall be taken to be a
continuation of the former act or acts, although the former set or
acts may be expressly repealed by the revised and consolidated
act; and "all rights and liabilities under the farmer act or RAI are
preserved and may be enforced" (State v. Bean, 1963, quoted in
Maceda v. Macaraig, 1993).
When RA 9294 re-enacted the provisions on the taxation
of income by OBU and EFCDU under the 1977 Tax Code, tt was
deemed to be a continuation of the exemption granted by the said
Tax Code. The tax exemption granted to OBU and EFCDU
transactions under the 1977 Tax Code is deemed to have been
preserved without interruption even under RA 8424, andtherOts
of the taxpayers to the exemption under the former Code may be
enforced without interruption.
84 Chapter II
Another argument that supports the above position may
come from the fact that RA 9294 is a curative statute and, as such,
should be given a retroactive effect. Article 4 of the New Civil Code
allows retroactive application in case of curative statutes.
The retroactivity of curative laws has been confirmed by
the Supreme Court when it described curative statutes as "healing
acts ... curing defects and addingto the means of enforcing existing
obligations . . . (and) are intended to supply defects, abridge
superfluities in existing laws, and curb certain evils . . . By their
very nature, curative statutes are retroactive . . . (and) reach back
to past events to correct errors or irregularities and to render valid
and effective attempted acts that would otherwise be ineffective
for the purpose the parties intended" (Development Bank of the
Philippines v. Court of Appeals, 198o). Thus, it has been held that
a judgment that was correct when rendered, holding that a
particular tax law was unconstitutional, may be reversed on
account of an amendment enacted pending appeal, by which the
defect in the law is cured (Ferry v. Campbell, n.d.).
From a policy standpoint, the government's rationale in
previously granting exemptions to OBUs and EFCDUs under the
old law was mainly to assure the growth of the foreign currency
deposit system, and more importantly, "to encourage the inflows
of foreign currency deposits into the banking institutions
authorized to accept such deposits in the Philippines, thereby
placing such institutions more in a position to properly channel
the same to loans and investments in the Philippines, thus directly
contributing to the economic development of the country"
(Whereas clauses, PD 1246, November 21, 1977).
The same rationale is embodied in FA 9294. This may be
viewed in accordance with the purpose for which the law was
crafted. The fact that the law was subsequently amended by
restoring the tax exemption may be viewed as clarifying the
original intention of the law (that is, to encourage foreign
currency inflows that could directly contribute to the country's
economic growth).
Banks 85
Allocation of expenses
between the RBU and FCDU
As a rule, expenses directly attributable to RBU or
FCDU activities should be allocated accordingly. On the other
hand, general and administrative expenses and other head
office expenses that cannot be directly attributed to either
activities should be allocated, based on the percentage of
income from said activities, to the total income of the bank as
prescribed under RR 12-8o (November 7, 198o).
Total expenses attributable to the FCDU is further
apportioned between income subject to the 32% corporate
income tax and Other income either exempt or taxed at 10% on
gross. Only the proportionate expense is claimed as deduction
in computing the liability to the 32% tax.
BRANCH PROFIT REMITTANCE TAX
A foreign bank authorized to do banking business in
the Philippines may either set up a Philippine subsidiary (either
partly or wholly) or a Philippine branch office. In the case of a
branch office, any profit earned in the Philippines and
subsequently remitted to its head office is subject to a 15%
BPRT, which is a final tax withheld at source prior to making
the remittance.
nature of BPRT
It is an equalization tax for the tax imposed on dividend,
which would otherwise have been paid if the payor had not been
a branch but a subsidiary of the home office or parent
corporation. It is levied to level the playing field on all foreign
corporations doing business in the Philippines as a branch or a
subsidiary.
86 Chapter II
BPRT is based on total The 15% BPRT is based on the total profits applied or
profits earmarked for earmarked for remittance without any deduction for the tax
remittance component thereof, that is, the 15% BPRT required to be
withheld. Thus, whatever gross amount or proportion is applied
or earmarked for remittance cannot be diminished by the 15%
BPRT when computing the liability to the BPRT. The amount
shall be grossed-up before imposing the withholding tax. For
example, if the amount earmarked for remittance is Ploo, the
BPRT is 15% of Pioo and not 15% of the amount actually
remitted, which is P85 (Pion minus Pi5 tax).
income not effectively Interests, dividends, rents, royalties, including
connected do not remuneration for technical services, salaries, wages, premiums,
constitute branch profits annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income and capital gains
received by a foreign corporation during each taxable year from
all sources within the Philippines shall not be treated as branch
profits unless these items are effectively connected with the
conduct of its trade or business in the Philippines [Section
28(A)(5), Tax Code].
BPRT on OBUs and EFCDUs
In the case of tax exempt income (i.e., offshore income)
of OBUs or EFCDUs that are subsequently remitted to the home
office by the branch, the rules are unclear whether these are
subject to the 15% BPRT even with the advent of the restoration
of the tax exemption provision under RA 9294. It is not clear
whether the "exempt from all taxes" provision under RA 9294
includes exemption from BPRT.
By virtue of BA 9294, which restored the broad basket
of tax exemptions enjoyed by OBUs and EFCDUs on offshore
income, any amount remitted to the head office pertaining to
items of income covered by the "exempt from all taxes"
Banks 87
provision referring to income with nonresidents, OBUs and
EFCDUs from foreign currency transaction may not be subject
to BPRT. Again, this is based on the provisions of RR 10-76,
using the principle of legislative re-enactment, which included
BPRT among the taxes covered by the exemption. The CTA, in
ING Bank Manila Branch v. Commissioner of Internal
Revenue (2005), upheld RR 10-76 in this respect and ruled
A that profits remitted by an OBU to its head office are exempt
from the BPRT under the laws prevailing prior to the 1997 Tax
Code by virtue of the "exempt from all taxes" provision.
There is, however, a contrary view that BPRT may not
be covered by the exemption provision. This view is premised
on the theory that BPRT is not a tax on the OBU or the EFCDU,
but a tax imposed on the profit of the head office on its income
from the branch, BPRT being an alternate tax for the dividend
tax. The head office and the branch are two different entities
for purposes of taxation. The exemption given to the branch's
EFCDU or OBU does not extend to the head office. Whet is
being taxed in the BPRT is the income of the head office and
not that of the EFCDU or the OBU.
These conflicting views have their own respective
merits. Thus, the restoration of the exemption by RA 92ge
notwithstanding, it is still unclear whether or not OBUs and
resident foreign banks with EFCDUs are liable to the 15% SPRT
with respect to the offshore income they receive. Unless the
BIR. clarifies this in a regulation, or the Courts decide with
finality, there will always be uncertainty with respect to the
EFCDUs' and OBUs' liability to BPRT on their offshore income.
Nevertheless, it is clear that income arising from
transactions not covered by the exemption, such as those
subject to the 35% regular income tax or the io% final tax (i.e.,
on onshore income), when remitted to the head office, is subject
to the 15% BPRT.
88 Chapter II
BPRT liability under RA 8424
The removal of the tax exemption on the offshore
income of OBUs and EFCDUs by RA 8424, and its subsequent
restoration under RA 9294, created a lot of uncertainties on
the liability of OBUs and EFCDUs to GRT, DST and to BPRT
during the time when its exemption was withdrawn.
With regard to BPRT, however, the restoration of the
exemption under RA. 9294 notwithstanding, OBUs and
EFCDUs may still be liable to BPRT during the period when
the tax exemption provisions of PD 1158 were withdrawn by
RA 8424. Such liability was confirmed by the CIA in a case
brought before it for resolution [ING Bank (Manila Branch) v.
Commissioner of Internal Revenue, 2002].
Considering, however, the sensitivity of the issue,
particularly with regard to its financial impact on the operations
of OBUs and FCDUs (billions of deficiency taxes were assessed
by the BIR) and the possible consequences on foreign
investments, a possible off-the-court settlement is being
pursued. At the same time, parallel efforts contesting the
assessments both administratively and with the courts are
ongoing.
IMPROPERLY ACCUMULATED
EARNINGS TAX
The improperly..accumulated earnings tax (IAET) is
levied at a rate of 10% on a corporation's improperly
accumulated taxable income (Section 29, Tax Code). The
Banks 89
obvious objective of the IAET is to discourage undue or
unwarranted accumulation of income that results from the
corporation's desire to avoid the dividend tax.
IAET does not apply to The IAET, however, does not apply to banks. A possible
banks explanation for this is the general need on the part of the bank
to accumulate or build up funds in order to effectively carry
out its business of providing financial intermediation.
WITHHOLDING TAX OBLIGATIONS
nature of Under a withholding tax system, the tax due on the
withholding tax income is deducted by the payor (who is constituted as the
government's withholding agent) from the gross amount of
income to be received by the payee at the time of payment, or
in some cases even before payment (such as in the case of
accrued income) of such income is made. The amount of tax
withheld shall then be remitted by the payor to the BIR. This
system of collecting the tax before the income actually passes
to the recipient is intended to ensure collection of appropriate
taxes due to the government, especially in instances where
income declaration and reporting may not be effectively
assured.
In the case of income from passive investments such
as interest income from deposits, deposit substitutes or other
financial instruments and dividend income from equity
investments, it is an internationally accepted practice to subject
these types of income to an FWT based on gross amount,
considering that there is minimal or nil expense associated with
the income that would justify a net-based income taxation. (The
taxation of interest payments on deposits, investment
certificates and debt instruments that comprise the bulk of a
90 Chapter II
bank's expense or income payments, and that are subject to an
FWT at rates depending on the status of the recipient, has been
exhaustively discussed in prior sections of this chapter. See also
sections on deposit substitutes, IMAs, ITFs, CTFs, and bank
deposits.)
role of banks Banks play a very important role in the collection of
taxes by way of withholding, especially on FWTs. The reason
for this lies in the fact that a substantial portion of the income
payments or expenses of banks is in the nature of interest
expense, which are subject to an FWT of 20% (or the applicable
rate). When an income is subjected to an FWT, the recipient is
no longer required to declare it in its income tax return. The
tax withheld is in lieu of all income taxes due on the income. In
contrast, a CWT, as the term implies, can be used only as a tax
credit to reduce the tax obligations of the income recipient.
In all instances of withholding, the payor (the bank or
any other institution) is required to hold the taxes deducted
and withheld as a special fund intrust for the government until
paid or remitted to the government. There are basically three
kinds of withholding taxes: FWT, CWT or expanded
withholding tax, and the withholding tax on compensation.
For purposes of discussion under this chapter, only
those specifically required to be withheld from the income
received or paid by banks are covered.
Final Withholding Tax
On interest income
Interest income from currency bank deposits and yield
or any other monetary benefit from deposit substitutes and
Banks 91
from trust funds and similar arrangements is subject to an MIT.
Interest payments made by banks to their clients are subjected
to an FWT to make tax collection easier. Should the taxation of
interest income be subject to a CWT, which was its previous
tax treatment, ferreting out underdeclaration or non-
declaration becomes a major problem due to the bank secrecy
law.
There are, however, a number of proposals in Congress
to convert the present FWT on interest income from beak
deposits to a CWT on the grounds that the 20% tax rate is qiihte
high, especially in the case of small savers (individuals wfth
very small or minimal deposit accounts), and is, therefore, en
impediment to promoting savings or thrift consciousness.
There are also proposals to exempt a threshold amount of
interest income for the same arguments.
withholding tax rate on Under existing rules, interest income is subject to an
interest income FWT at varying rates depending on the recipient of the interest
income. A bank paying an interest income to its clients is
required to withhold the tax at the following rates:
1. If paid to an individual citizen or individual
resident alien and nonresident alien engaged
in trade or business within the Philippines:
a. 20% from any currency bank deposit and
yield or any other monetary benefit from
deposit substitutes, trust funds and similar
arrangements
b. o% (exempt) from long-term deposit or
investment in the form of savings, common
or individual trust funds, deposit
substitutes, investment management
accounts, and other investments
evidenced by certificates in such form
prescribed by the BSP. If the deposit or


92 Chapter II Banks 93

investment is preterminated before the fifth d. 10% if paid by an OBU or EFCDU to

year, a final tax at the following rates shall residents arising from foreign currency
be deducted based on the remaining loans granted by such OBU and EFCDU
maturity of the instruments:
4. If paid to a nonresident foreign corporation:
• From four years to less than five years
- 5% a. 35%, or the applicable treaty rate
From three years to less than four years b. 20% if arising from a foreign loan
•
- 12% c. o% if paid by an OBU or EFCDU
• Less than three years - 20%
Exempt organizations Notwithstanding the income tax exemptions granted to
c. 7.5% if paid to a citizen and resident alien
certain individuals, entities or organizations, the interest
by a depository bank under the expanded
income derived by these exempt entities from their currency
foreign currency deposit system; o% if paid
bank deposits and deposit substitutes, trust accounts or other
to a nonresident engaged in trade or
similar arrangements is still subject to an FWT.
business in the Philippines
nonstock nonprofit Nonstock nonprofit corporations, such as those falling
2. If paid to a nonresident individual not engaged corporations under Section 3o of the Tax Code, are still liable to the 20% (or
in trade or business in the Philippines:
applicable rate) FWT imposed on their interest income from
deposits and deposit substitute instruments [RMC 76-03
a. 25%, or the applicable treaty rate
(November 14, 2003) and BIR Ruling No. DA-562-98
b. o% if paid by a depository bank under the
(December 9,1998)]. Likewise, nonstock nonprofit educational
.0BU or EFCDU
institutions, notwithstanding the broad exemptions they enjoy,
are subject to the corresponding final taxes (i.e., 20% or 7.5%
3. If paid to a domestic corporation and resident
for dollar-denominated deposits) on their interest income on
foreign corporation:
bank deposits and deposit substitutes if these are not directly
and exclusively in pursuance of their purposes (RMC 76-03).
a. 2o% from any currency bank deposit and
yield or any other monetary benefit from BOI and PEZA Similarly, entities that enjoy Income Tax Holiday (ITH)
deposit substitutes, trust funds and similar
and that are under the 5% gross income tax regime—like entities
arrangements
registered with the Board of Investments (BOI) and the Philippine
b. 7.5% if paid by a depository bank under the
Economic Zone Authority (PEZA)—are liable to the FWT imposed
expanded foreign currency deposit system
on the interest income from bank deposits and deposit substitutes
c. o% if paid by an OBU or EFCDU to another received by them (RR 20-02, October 14, 2002).
resident OBU or EFCDU authorized by the
BSP under the expanded foreign currency
Rural banks enjoying incentives under RA 7353 (April
deposit system 2, 1992) are still subject to the 20% final tax imposed on their
94 Chapter II
interest income received from currency bank deposits, deposit
substitutes, trust funds, and similar arrangements (RR 16-93,
April 22, 1993).
employees' retirement However, any income from investment received by
fund employees' retirement funds that are put in trust accounts with
banks and that are tax-qualified retirement plans are exempt
from income tax and, consequently, from withholding tax.
Hence, interest income on currency bank deposits or yield on
deposit substitutes earned by these retirement funds/trusts is
not subject to the 2o% final tax or to the 7.5% final tax on foreign
currency deposits with banks (BIR Ruling No. DA-132-o3, April
28, 2003).
On dividend income (cash and property)
withholding tax on A dividend income is subject to a final tax at the
dividend income following rates:
1. If paid to a citizen or a resident alien: lo%
2. If paid to a nonresident alien engaged in trade
or business in the Philippines: 2o%
3. If paid to a nonresident alien not engaged in
trade or business in the Philippines : 25%, or
the applicable treaty rate
4. If paid to a domestic or a resident foreign
corporation: o% (intercorporate)
5. If paid to a nonresident foreign corporation:
35%, or the applicable treaty rate
On foreclosure sales
Judicial or extrajudicial foreclosure of mortgaged
property by a bank is subject to the taxes applicable to sales or
Banks 95
transfers of properties. It is subject to a capital gains tax (CGT)
or to the 35% regular income tax based on net income
depending on the classification of the asset to the debtor-seller.
If the property foreclosed is a capital asset of the debtor-seller,
it is subject to a 6% CGT. If it is an ordinary asset (such as in
the case of properties held for sale by a real estate dealer), then
it is subject to the 35% regular income tax based on net income.
withholding tax on On the part of the bank as purchaser of the asset by
foreclosed property way of foreclosure, payments made by it to the debtor are
subject to withholding taxes, which could either be an FWT or
a creditable or expanded withholding tax. The rules are as
follows:
1. If the property foreclosed is a capital asset of
the debtor, a 6% CGT (which is a -Niel tax) is to
be withheld by the bank and remitted to the
BIR. Being in the nature of a final tax, the 6%
CGT is deemed to be in full settlement of the
tax otherwise due on the income. In the eue of
exempt transactions, such as in the case of
foreclosure of the principal residence of the
debtor, this may be exempt from the 6% COT
subject to certain conditions.
2. If, on the other hand, the property foreclosed is
an ordinary asset of the debtor and the debtor
is a real estate dealer or lessor, the tax required
to be withheld is a CWT at the following rates:
(a) 1.5% if with a selling price or zonal value of
P500,000 or less; (b) 3% if with a selling price
or zonal value of more than P5oo,000 but less
than P2 million; (c) 5% if with a selling price or
zonal value of more than P2 million; (d) 0% for
exempt sales.
3. If the property foreclosed is used in the trade
or business of the debtor, but the debtor Is not
96 Chapter II Banks 97
a real estate dealer or lessor, it is subject to a
CWT of 6% (in contrast to the 6% CGT on
foreclosures of capital assets, which is final).
The amount withheld can be used as a tax credit
against the income tax liabilities of the debtor
in the year the transaction or foreclosure
occurred.
Under Section 47 of FA 8791, an individual mortgagor
or debtor whose real property has been foreclosed, either
judicially or extra-judicially, has within one year after the sale
to redeem the property by paying the amount due under the
mortgage deed, including the interest, costs and expenses
incurred by the bank incidental to the foreclosure. This is the
redemption period one year redemption period.
- the bank by a TTC (other than a bank or a financial
For juridical persons, the right to redeem expires after
the registration of the certificate of foreclosure sale with the
applicable Register of Deeds, which in no case shall be more
than three months after foreclosure. Thus, while taxes (CGT,
CWT and DST) are due on the foreclosure, these are payable to
the BIR only after the expiration of the applicable period of
redemption (BIR Ruling No. DA-361-04, June 28, 2004).
Creditable Withholding Tax
2% CWT by a TTC Interests, discounts, commissions and other fees paid
to financial institutions by their clients are income derived from
sale of services as a financial intermediary. Therefore, these
are subject to a 2% CWT if the payor of the income is a BIR-
designated TTC [RR 17-03 (March 31, 2003); RMC 72-04
(November 16, 2004)].
The BIR clarified in one ruling that interest payments
made by the TTCs on loans obtained from banks are subject to
a 2% CWT [RR No. 17-03, and BIR Ruling No. DA-104-04
(March 8, 2004)]. The payor of the income, which is constituted
as the withholding agent holding the amount withheld in trust
for the government, is mandated to remit it to the BIR within a
prescribed period.
The 2% CWT applies only if the payment is not subject
to another rate of withholding tax (either final or creditable),
as required under existing regulations. Hence, if the interest
income is already subjected to a 2o% final tax, it shall not again
be subjected to the 2% CWT required under RR 17-03 (BIR
Ruling No. DA-201-04, April 12, 2004). For example, interest
income received by a bank from a deposit substitute placed with
another bank is subject to a 20% final tax, but not anymore to
the 2% CWT. But a payment of interest on a loan obtained from
intermediary) is subject to the 2% CWT. Likewise, if the income
is subject to the 10% final tax imposed on the income of OBUs
and FCDUs, the same is no longer subject to the 2% CWT.
Interest paid on loans funded by trust accounts is an
income that accrues to the trust and not to the bank. It is an
income of the trust and not of the bank. The applicable
withholding tax, therefore, is that which is applicable to the
trust and not to the bank. Thus, interest paid on loans funded
by trust accounts is in the nature of a passive income and not
an ordinary income derivedfrom a sale of service (e g , financial
intermediation). Consequently, the 2% CWT, which is required
from income payments on sales of services, does not apply. The
interest income may, however, be subject to a 20% final tax.
It is to be emphasized that the 2% CWT applies only on
the amount of interest income and service fees received by
banks. It does not apply to the amount representing payment
of principal.

98 Chapter II
GROSS RECEIPTS TAX
Other than the tax on income, banks (being engaged in
the business of financial intermediation) are also subject to a
business tax. The business tax applicable to banks is the gross
receipts tax (GRT). The GRT is imposed on banks in lieu of
VAT, which is the business tax applicable to most businesses.
Like any business tax, the GRT is an indirect tax that
may be shifted forward to the customers usually- as a built-in
component of the interest or intermediation charge. It therefore
tends to affect the cost of borrowing. The increase in price or
cost of financial intermediation (in addition to the difficulty of
determining the input VAT credit) was one of the arguments
of the financial sector when the VAT, in lieu of the GRT, was
imposed. It was in recognition of these problems that the
application of the VAT on the financial sector was deferred not
just once but a number of times, and that when the VAT was
finally applied on the financial sector, said application was
immediately repealed and the GRT was again imposed.
quasi banking
-
Rates of GRT
The liability of banks to the GRT is based on their gross
receipts derived from sources within the. Philippines in
accordance with the following rates (Setion 121, Tax Code as
amended by RA 9238 effective January 1, 2004, and RA 9337,
November 1, 2005):
a. On interest, commissions and discounts from
lending activities as well as income from
financial leasing, on the basis of the remaining
Banks 99
maturities of the instruments from which such
receipts are derived:
i. Maturity period is five years or less: 5%
ii. Maturity period is more than five years: 1%
b. On dividends and equity shares in net income
of subsidiaries: o%
c. On royalties or rental from real or personal
property, profits from exchange and all other
items treated as gross income pursuant to
Section 32 (definition of gross income) of the
Code: 7%
d. On net trading gains within the taxallle year on
foreign currency, debt securities, derivatives
and other similar financial instruments: 7%
The same rates of GRT apply to NBFIs performing
quasi-banking (QB) functions.
QB functions mean the borrowing of funds for the
borrower's own account, through the issuance, endorsement, or
acceptance of debt instruments of any kind other than deposits,
or through the issuance of participations, certificates of assignment
or similar instruments with recourse, trust certificates or of
repurchase agreements from 20 or more lenders at any one time,
for purposes of relending or purchasing receivables and other
similar obligations. Commercial, industrial and other nonfinancial
companies that borrow funds through any of these means for the
limited purpose of financing their own needs or the needs of their
agents or dealers shall notbe considered performing QB functions
(RR 09-04, June 21, 2004).
Based on the provisions of RA 9238, which reverted
financial institutions to the GRT, and as implemented by RR
09-04, the GRT rates have been significantly modified.
Whereas before, there were four rates (o%, 1%, 3% and 5%)
100 Chapter II Banks 101

depending on the maturity of the financial instruments
involved, there are now only two rates applicable (1% and 5%),
but still based on the instrument's maturity period. The
application of a lower GRT rate of 1% on gross receipts derived
from financial instruments with a longer maturity period (more
than five years) is designed to encourage long-term savings,
thereby creating more opportunities for growth. From the
perspective of tax administration, the reduction in the number
of rates simplified compliance and implementation.
Subsequently, pursuant to RA 9337 (the Reformed VAT
Law, May 24, 2005), the rate of GRT on non-lending income,
such as those under (3) and (4) as enumerated above, has been
increased from 5% to 7% effective November 1, 2005. This
increase in rate has reverted a three-tiered•RT rate (1N, 5% .
and now, 7%), with the highest rate imposed on non-lending
related income.
Year
in the GRT return covering all transactions of the month in
which the pretermination occurs.
To illustrate:
On November 10, 2004, a borrower contracts with Bank
Y a long-term loan of P5 million payable within ten years, with
the first installment due on or before November 10, 2005, and
the succeeding yearly installment on the same date of the
subsequent years. If the loan is terminated on its fifth year
(November so, 2009) and if interest and other fees paid to Bank
Y amount to P1oo,000 annually, the applicable GRT will be as
follows:
Table 2.1
Remaining Maturity Interest, Fees Tax Rate GRT

Effect of pretermination of instrument 2005 9 P 100,000 1% P 1,000

2006 8 P 100,000 1% P 1,000
2007 7 P100,000 1% P1,000
2008 6 P100,000 1% P1,000
The application of the 1% or 5% GRT rate is reckoned 2009 5 P 100,000 5% P 5,000
from the remaining maturity of the instrument. For example,
an instrument with a maturity period of six years is subject to Total P 9,000
the lower GRT rate of 1%; the 5% GRT will apply a year after,
when the remaining maturity period would only be five years.

In case of pretermination of the instrument, the GRT

rate shall be adjusted to reflect the correct amount to be paid
based on the new maturity period effecting the pretermination.
The maturity period is reckoned to end on the date of
pretermination for purposes of classifying the transaction and
applying the correct tax rate (RR o9-04).

adjustments on Adjustments in the GRT rate that are caused by

pretermination reflected pretermination of existing agreements and that result in
separately in the return additional payment of GRT are to be reflected as separate items
102 Chapter II Banks 103

Upon termination in 2009, the loan shall be reclassified quasi-banks from their non-lending activities, more specifically
and the correct GRT, including for prior years, shall be on the following types of income:
recomputed on the basis of the new maturity as:
1. On royalties or rental from real or personal
property, profits from exchange and all other
Table 2.2 items treated as gross income pursuant to
Section 32 of the Tax Code
Year Rem aining Maturity Interest, Fees Tax Rate GRT
2. On net trading gains within the taxable year en
P 100,000 5% P5,000
foreign currency, debt securities, derivatives
2005 4
3 P 100,000 5% P 5,000 and other similar financial instruments
2006
2007 2 P 100,000 5% P 5,000
2008 1 P 100,000 5% P 5,000 The 5% and 1% GRT rates apply only to income from
2009 Less than one year P 100,000 5% P 5,000 lending activities such as interest, commissions and discounts
from lending activities as well as income from financial leasing
on the basis of the remaining maturities of the instruments.
Total GRT Due P25,000

Less: GRT Paid P 9,000
lending vs. non lending
- Because of the difference in the rate of GRT applicable
GRT Payable P 16,000 income to lending activities (5% or 1%) vis-a-vis those derived from
non-lending activities (7%), it becomes very important to make
It is apparent from the illustration that pretermination a proper determination and classification of the types of income
may work to the disadvantage not only of the bank, but of the earned by banks.
client as well, since the GRT is a passed-on tax. However, in
the case of fixed interest-bearing instruments where the bank For example, should income derived from investments
may not have the flexibility to adjust the interest rate, the bank in Republic of the Philippines (ROP) bonds, treasury notes and
may end up absorbing the additional GRT to be paid in case of commercial papers be considered income from lending, subject
pre-termination, unless it can recover these in the form of pre- to the 1% or 5% GRT? Or should it be considered income from
investing (non-lending), which is subject to 7% GRT?
termination penalties.
To date, the BIR has not issued any clarification se to
what activities are lending or non-lending. In the case of interest
Non-lending income subject to 7%
income, commission or discounts received from ROP bonds,
treasury notes, commercial papers and similar arrangements,
RA 9337, which took effect on July 1, 2005 (deferred to however, the GRT rate applicable may be that imposed on
November 1, 2005 under RR 16-05), increased the rate of GRT lending at 1% to 5% since these instruments are embraced in
from 5% to 7% on income earned or received by banks and the definition of debt instruments. (See discussion of debt
instruments under DST section.)
104 Chapter II
debt instruments are Debt instruments are defined under the Tax Code as
borrowing and lending instruments representing borrowing and lending transactions.
transactions Being so, the interest income received from deposit substitute
transactions and debt instruments, in contrast to the interest
income received from investments, may therefore be
considered income from lending transactions subject to either
1% or 5%, and not to the 7% imposed on non-lending income.
Note further that the amendment introduced in RA
9337 to increase the rate from 5% to 7% refers only to Section
121 of the Tax Code referring to banks and NBFIs with QB
functions. It does not apply to Section 122 of the same code,
which pertains to financing companies and other financial
institutions without QB functions.
The higher GRT rate applicable to banks for similar
services and transactions tilts the playing field in favor of these
other financial institutions
Determination of gross receipts
Gross receipts defined
Under RR 09-04, the term "gross receipts" is defined
to refer to the compensation for all financial and nonfinancial
services, or a combination thereof, performed by financial
institutions within the Philippines, which include the following:
1. Financial intermediation fee (interest income)
2. Financial leasing income
3. Rentals on properties, real or personal
4. Royalties
5. Commissions
6. Trust fees
Banks 105
Estate planning fees
Service fees
9. Other charges or fees received as compensation
for services
10. Net trading gains
Gain on sale or redemption of investments
12. Net gain from the sale of properties acquired
through foreclosure lodged under the account
"Real and Other Properties Owned and
Acquired" (ROPOA) or under any other
appropriate account
13. All other receipts of gross income specified
under Section 32(A) of the Tax Code not
otherwise enumerated above
The above enumeration is a long list of income items
normally received by banks, plus a catch-all provision under
(13), which covers all other items of gross receipts not
specifically enumerated.
gross receipts It is to be emphasized, however, that gross receipts
constituting gross subject to GRT refers only to gross receipts constituting items
income of gross income. Thus, gross receipts or collections representing
payment of principal under a loan contract are not subject to
GRT as these are not receipts of income.
4 main categories of For purposes of determining the GRT rate applicable,
gross receipts the above enumeration of gross receipts is classified into the
following categories:
1. Interest, commissions and discounts from
lending activities, as well as income from
financial leasing, subject to a GRT rate of 1%
or 5%, based on the maturity of the instrument
These are normally referred to as financial
intermediation fees. In the case of financial
leasing, the taxable gross receipts shall consist


106 Chapter II Banks 107

only of the interest income component c. Gains derived from dealings in property
excluding the amount representing a receipt of d. Interests
the principal (see further discussions in Chapter e. Rents
W on financial leasing). f. Royalties
g. Dividends
2. Dividends and equity shares in net income of h. Annuities
subsidiaries subject to GRT at 0% i. Prizes and winnings
j. Pensions
Of the four broad categories of gross receipts, k. Partners' distributive shares from the net
only dividends and equity shares in the net income of a general professional
income of subsidiaries are subject to a o% GRT. partnership
The imposition of a o% GRT on dividends and
equity shares in net income of subsidiaries is From this broad listing, it can be presumed that
consistent with the exemption from income tax the intention of the law is to subject to OR!' all
on intercorporate dividends. items of receipts that are likely to inure to the
bank. The items of income under, Section 32
3. Royalties, rentals of property (real or that are not covered under any of the other
personal), profits from exchange and all other categories of gross receipts—such as those
items treated as gross income under Section under items (1), (2) and (4)—are covered under
32 of the Tax Code (that is, all income derived this category.
from whatever source) other than those
already covered under items 1, 2 or 4, subject sales of ROPOA subject Sales of ROPOA and any other profits from
to GRT at 7% to 7% GRT exchange of property are subject to a 7% GRT
based on net gains (RR 09- 04).
/catch-all provision Included in this category is a catch-all provision
relating to all other items treated as gross Net trading gains within the taxable yew' on
4.
income under Section 32 of the Tax Code. foreign currency, debt securities, derivatives
Section 32 of the Tax Code defines gross income and other similar financial instruments subject
as all income derived from whatever source, to a 7% GRT
including, but not limited to, the following:

a. Compensation for services in whatever Net trading gains

form paid including, but not limited to, fees,
salaries, wages, commissions and similar
items
b. Gross income derived from the conduct of
trade or business or the exercise of a
profession
A substantial portion of the income received by banks
is the net trading gains on foreign currency, debt securities,
derivatives and other similar financial instruments. Thus, RA
9238 introduced a new category of income comprising these
108 Chap ter II
Banks 109

items and subjected it to a 5% GRT. Subsequently, the rate already reflected in the previous months of the same taxable
was increased to 7% under RA 9337. year.

Prior to RA 9238, there was no explicit provision To illustrate, assume that Bank Y has the following
regarding the liability of trading gains to the GRT. This was income/loss for the month of July, 2oo5:
captured, by implication, only under the catch-all provision
then existing under the old law. However, notwithstanding the
inclusion of the GRT liability in the catch-all provision, the BIR Table 2.3
failed to issue guidelines to clearly provide for the basis of the
correct imposition of the GRT, whether the same shall be based
on gross income or on net gain. Thus, this had been a long- Amount GRT Rate Tax
standing conflict between the -banking industry and the BIR,
Interest income from instruments with P 100,000 5% P 50,000
until RA 9238 put an end to it. rreturity of less than five years

basis of GRT is RA 9238 clarified that the basis for GRT is net trading Rental income 200,000 7% 14,000
net trading gains gain, thereby removing the problems associated with equity
issues and the difficulties of implementation raised against the Net trading loss (50,000) 7% -

GRT system based on gross income as applied to trading gains.

Exclusion of the capital is consistent with the exclusion of a Total GRT 64,000
repayment representing the principal amount of a loan from
the GRT base.

The rationale of computing the GRT based on net

trading gains computed on a cumulative yearly basis (that is,
net trading gains or loss at end of taxable year) on foreign
currency, debt securities, derivatives and other similar financial
instruments is not a departure from the total concept of gross
receipts. Rather, it is more of a practical recognition of the
peculiarities of the financial instruments from which the gains
are to be realized.

CUMULATIVE In computing for the net trading gains within the

REPORTING OF NET taxable year, the amount to be reported in the monthly GRT
GAINS return is the cumulative total of the net trading gain or loss
starting from the first month of the taxable year (January) up
to the month coveringthe period of the return, less the amounts
110 Chapter 11 Banks 111

In August 2005, Bank Y made the following income/
loss:
Table 2.4
Interest income from instruments with
maturity of less than five years
Net trading gain of P60,000; less net
trading toss of July 2005 (P50,000)
Total
What is not clear, though, is whether offsetting can be
allowed on net trading gains or loss relating to trading of
different objects. In other words, can offsetting be allowed as
long as the activity falls under (d) even if the object traded is
different (e.g., a trading gain from foreign currency against a
trading loss from debt instruments)?
Amount GRT Rate Tax
The phrase used in the regulations is "same items of
P 50,000
income under (d)." The phrase "same items of income" has not
P 100,000 '5%
been clarified; it is not clear if it refers to income from the same
activity of trading (regardless of the object traded) or to inaeme
10,000 7% 700
of the same objects traded. The latter allows offsetting of
income/loss only if the object traded is within the same
classification.
P 50,700

Net gains from ROPOA

If Bank Y has a cumulative net trading loss at the end

of a taxable year, this trading loss can no longer be carried over
to the next taxable year and can no longer be deducted against
any-trading gains earned in any taxable year other than the year
when it was incurred.
Aside from a yearly cumulative computation of net
Determination of net
gain or loss in a trading gain or loss, the determination of net gain only allows
taxable year the offsetting of income or loss from similar activities. Thus,
the net trading loss on items of income provided in Section
121(d) of the Tax Code (see "Rates of GRT" section in this
chapter), referring to trading gains from foreign currency, debt
substitutes, derivatives and other similar financial instruments,
may be deducted only from the net trading gain on items of
income under (d) but not from any other items of gross receipts
offsetting allowed on
same items of income to arrive at the total monthly GRT due. For example, a net
trading loss from foreign currency cannot be offset against net
gain from ROPOA or from gross receipts on interest or other
service fees.
DETERMINATION OF In the case of sales of ROPOA, or other foreclosed assets
NET GAINS lodged in any other account, RR 09-04 provides that the net
gain to be reported for GRT purposes is the difference between
the selling price, or the consideration received for such age,
and the carrying cost or book value of the asset at the time of
sale as determined in accordance with the generally accepted
accounting principles (GAAP) prescribed by the ESP for basks
and NBFIs performing QB functions.
carrying cost or The carrying cost or book value is equal to the balance
book value of the loan (principal plus booked accrued interest receivable
for time loans, or principal less unamortized income for bills
discounted) or the bid/purchase price of the ROPOA upon
foreclosure, whichever is lower. Non-refundable CGT and DST
paid in connection with the foreclosure or purchase at the
acquired asset are included in the book value of the ROPOA.
Note that the determination of the market value of the
property sold or exchanged, for purposes of GRT, is limited

112 Chapter II
only to the selling price or actual consideration received,
whichever is higher, and does not include any reference to the
zonal value of the property.
zonal valuation not a Unlike in determining the net gain for purposes of
reference in imposing the income tax and withholding tax (see sales of
determining market ROPOA under section on income tax), or in determining the
value of ROPOA amount subject to DST (see DST section in this chapter), the
zonal valuation prescribed by the BIR is required to be used as
a reference in ascertaining the market value on which the CGT
or the DST is imposed. The sale of ROPOA, for purposes of
GRT, is not benchmarked to the BIR-prescribed zonal valuation
of the property.
Also, unlike the case of net trading gains from foreign
exchange, deposit substitutes and derivatives under item (d),
the computation of net gains from ROPOA is not cumulative.
Thus, the income is determined on a monthly basis and not on
a yearly basis.
Accrual vs. actual collection
Pursuant to the changes introduced by RA 9238, the
determination or calculation of gross receipts shall be in
accordance with GAAP prescribed by the BSP or by the SEC in
the case of financial institutions under their respective
supervision.
This provision raises a number of issues.
First, under BSP regulations, banks are required to
report their financial statements in accordance with specific
rules and guidelines required by the BSP, which may not
necessarily be in accordance with GAAP. In fact, banks are
required to submit two different sets of financial statements
for banks: (1) that which is required by the SEC, which follows
Banks 113
GAAP vs. the GAAP, and (2) that which is required by the BSP, which
Prudential Reporting follows the BSP requirements collectively called Prudential
Reporting (PR). Normally, a reconciliation is made so that the
financial statement presented in accordance with GAAP is
adjusted to comply with PR.
Thus, the RA 9238 requirement that gross receipts be
computed in accordance with GAAP prescribed under BSP rules
is vague because the BSP does not require financial statements
to be in accordance with GAAP. It requires a set of financial
statements different from GAAP, which is the PR.
Second, the provision of the law is not clear whether
the GRT should be based on accrued income or on actual
collection of income. The BSP allows the use of accrual method
in the recognition of income. Under the accrual method, items
of income are recognized when earned even if these are not yet
collected.
Third, the provision distinguishes financial institutions
under BSP supervision from those under SEC supervision.
Under this situation then, the determination of gross receipts
subject to GRT depends on the regulatory agency that
supervises the financial institution, and no longer with the tax
authority.
accrued income vs. Most unsettling is the determination of the taxable base:
gross receipts is it based on accrued income or on gross receipts? Because of
the lack of implementing guidelines from the BIR clarifying
this new provision introduced by RA 9238, it is possible that
banks have adopted different practices in the computation of
the taxable base for GRT. Some banks may have computed the
GRT based on accrual method while some may have used the
collection method. Considering this, there is a possibility that
this could ripen into another industry issue, with the BIR
resorting to tax assessments.
114 Chapter II
Certainly, each method, whether accrual or actual
collection, has its own pros and cons but for consistency and
simplicity in compliance with the GRT, the application of the
new provision has to be clarified by the BIR or the courts, in
cases elevated to them for resolution.
Pending clarification from the BIR/DOF or the courts
as to the basis on which the GRT shall be imposed, the new
provision may be interpreted in harmony with the basic
principles and concepts of taxation.
The term "gross receipts" is usually referred to in
taxation as collection, whether actual or constructive. There is
also the principle that business taxes, like GRT, can only be
imposed on items of income. Thus, taking them together, the
tax (GRT) is imposed on items of income collected. The term
"gross receipts in accordance with GAAP as required by BSP"
may, therefore, refer to the collection (actual or constructive)
of items constituting gross income, whether that income be
recognized or recorded in accordance with BSP rules or with
GAAP.
For purposes of GRT, therefore, as interpreted in
relation to the wordings of RA 9294, the taxable base of GRT
may be based on the actual or constructive receipts or collection
of items constituting gross income as determinedin accordance
with BSP rules or with GAAP. Amounts collected representing
payment of the principal in a loan are not subject to GRT as
these are not collection of items constituting gross income.
Related to this topic is the effect of this new provision
on the adoption of the new Philippine Accounting Standards
(PAS), particularly PAS 32 and 39, in the determination of the
taxable base for GRT. For example, would the increase or
decrease •in revenue as a result of a "mark-to-market"
recognition of financial instruments, as required under the new
standards, be subject to GRT?
Banks 115
Again, in the absence of clear guidelines from the BIR,
it may be safe to rely on the basic principles of taxation. A tax
on income (such as GRT and income tax) can be imposed only
on an income that is realized. That is, the transaction giving
rise to the income is a "closed and completed" transaction.
mark-to-market In the case of a "mark-to-market" income recognition,
income recognition the income is not yet realized, but is recognized in the books
only for purposes of presentingthe fair value of the instruments
at a certain period of time. As such, any amount representing
adjustment to income based on a mark-to-market recognition
should not be subject to GRT, whether the GRT be based on
accrual or on gross receipt, since the income is not yet realized.
The transaction giving rise to that income is not yet "closed
and complete" for taxation purposes.
Similarly, any loss arising from a marks-to-market
recognition cannot be offset against any taxable income subject
to GRT.
Gross receipts include amount of tax withheld
In the computation of the GRT, gross receipts include
the amount of tax withheld by the payor and remitted to the
BIR. The GRT is based on the gross amount of income
undiminished by any amount representing the tax withheld on
such income by the payor. For example, the 20% final tax
withheld from interest income received by banks and quasi-
banks form part of the taxable base subject to GRT. This was
confirmedby the Supreme Court in several cases brought before
it (G.R. No. 148191, November 25, 2003; G.R. Nos. 146749 and
147938, June 10, 2003).
116 Chapter II
The inclusion of the tax withheld in the GRT base does
not constitute double taxation. The GRT is a business tax while
the 2o% FWT is an income tax. There is no double taxation if
the law imposes two different taxes on the same income,
business or property.
Banks are liable to GRT only
While some financial institutions may be liable to both
VAT and GRT (refer to Chapter III, Insurance Companies, as
an example), banks are subject to only one kind of business
taxation, the GRT, regardless of the nature of the income they
receive.
The GRT provision is broad enough to cover all forms
of receipts of income, as can be seen from the inclusion of a
catch-all provision that covers all other items treated as gross
income under Section 32 of the Tax Code. Thus, because of the
inclusion of this catch-all provision, any other item of receipt
or collection of income not related to financial intermediation,
which by its nature is ordinarily subject to VAT, is subject to
GRT (not VAT) if received by a bank.
GRT on OBU and EFCDU transactions
OBUs and EFCDUs are subject to GRT at the applicable
rates with respect to income received by them as such. However,
by virtue of RA 9294, which exempts the offshore income
(income from foreign currency transactions with nonresidents
and other OBUs and EFCDUs) from all taxes, it is not clear
whether such income is subject to GRT.
The BIR has not yet issued the regulation to clarify the
provisions of RA 9294 (law restoring the exemption of OBUs
Banks 117
and EFCDUs) specifically as regards taxes covered by the
bases for exemption of exemption. However, there may be strong bases, given the
OBUs and EFCDUs reasons stated below, to consider OBUs and EFCDUs exempt
from GRT from GRT on their offshore income:
1. The exemption on offshore income refers to
taxes imposed on income. GRT is a tax imposed
on income.
2. The term "exempt from all taxes" is broad
enough to cover GRT.
If we have to consider the reason behind the
3.
need to enact RA 9294 (that is, to restore the
eiemption prior to RA 8424), the only logical
conclusion is that GRT is cover,ed by the
exemption.
Based on the principle of legislative re-
4-
enactment as explained earlier, the
interpretation under RR to-76, which includes
GRT in the taxes covered by the exemption,
remains.
Notwithstanding all these, it may still be important for
the BIR to clarify its position on this matter considering that,
although the intention of Congress in enacting RA 9294 is to
revive the exemptions under PD 1158, RA 9294 is not a complete
reproduction of the old law.
income not covered by Other income subject to the regular 35% income tax
exemption subject to and interest income from foreign currency loans with residents
GRT subject to the to% final tax may be subject to GRT at the
applicable rates outlined earlier.
3',

118 Chapter II
DOCUMENTARY STAMP TAX
As structured, the DST system is complicated,
characterized by varying rates depending on the type of
document being taxed (Sections 174-198, Tax Code). It is for
this reason that RA 9243 (An Act to Rationalize the DST
Provisions of the Tax Code) was issued on February 17, 2004,
and made effective on March 2o, 2004. By the very nature of
their business as financial institutions, banks are mostly
burdenedby DST because their transactions and the documents
they issue are mostly subject to DST.
Documents and transactions
subject to DST
Table 2.5 shows some of the documents that are
commonly issued by financial institutions and that are subject
RA 9243 to DST (DST rates are updated pursuant to RA 9243, the
Rationalization of the DST Law).
1'
The new DST rates imposed by RA 9294 under Sections
174, 178, 179, 18o, 181 and 182 apply to all transactions made
or documents/instruments issued or executed as of March 2o,
2004, the date when RA 9243 took effect (RR 13-04, December
23, 2004).
Type of Document
Original issue of shares of stocks
Bank checks, drafts, certificates of deposit not
bearing interest and other instruments
All debt instruments
All bills of exchange (between points within the
Philippines) or drafts
Acceptance of bills of exchange for the payment of P0.30 on each P200 or fractional part thereof of the fide
money drawn in a foreign country but payable in
the Philippines
Foreign bills of exchange and letters of credit
drawn in but payable outside the Philippines
Mortgages, pledges and deeds of trust
Deeds of sale and conveyance of real property
Assignments or renewals of mortgage, or the
renewal or continuance of any contract or evidence (Section 198, Tax Code)
of obligation or indebtedness by altering or
otherwise except if there is no change in the
maturity date or remaining period of coverage from
that of the original
Banks 119
Table 2.5
DST
P1 on each P200 or fractional part thereof of the par vatte
of shares of stocks. In case of no-par shares, the DST is
based on actual consideration for the shares Issued. In
the case of stock dividend, the DST is based on the 'eiue
represented by each share (Section 174, Tax Code)
P1.50 each (Section 178, Tax Code)
P1 on each P200, or fractional part thereof, of issu
price of such instruments (Section 179, Tax Code). Pert
l
debt instruments with less than one year, the DST is
proportional with the ratio of its term to 365 days (Seetton
179, Tax Code)
P0.30 on each P200 or fractional part thereof of the Us
value of such bill of exchange or draft (Section 180, TIM
Code)
value of such instruments (Section 181, Tax Code)
P0.30 on each P200, or fractional part thereof, of the itice
value of such instruments (Section 182, Tax Code)
P20 if amount secured does not exceed P5,000; P1 10-en
each P5,000 or fractional part in excess of P5,000
(Section 195, Tax Code)
P15 for every P1,000 based on the consideration or iter
market value (FMV) or zonal value of the real property
(less any proper allowance for encumbrance)
Same rate of DST imposed on the original document
If
120 Chapter II
RA 9243 introduced many changes, especially on
documents issued or transactions entered into by banks. For
instance, debentures and certificates of indebtedness—as well
as due bills and certificates of obligations, which used to be
covered by different sections and taxed differently under the
old law—are now incorporated under one section together with
other debt instruments, and are taxed a unitary rate of DST
(Section 179, Tax Code). RA 9243 likewise equalized the DST
on equity and debt instruments so as to make the tax neutral
with respect to the form of financing pursued by business
enterprises.
Debt instruments
As defined under the Tax Code, debt instruments, for
purposes of DST imposition, refer to instruments representing
borrowing and lending transactions including, but not limited
to, the following:
i. Debentures
2. Certificates of indebtedness
3. Due bills
4. Bonds
5. Loan agreements, including those signed
abroad where the object of contract is located
or used in the Philippines
6. Instruments and securities issued by the
government or any of its instrumentalities
7. Deposit substitute debt instruments
8. Certificates or other evidences of deposits that
are drawing interest signifidantly higher than
the regular savings deposit, taking into
consideration the size of the deposit and the
risks involved
9. Certificates or other evidences of deposits
drawing interest and having a specific maturity
date
Banks 121
io. Orders for payment of any such money
otherwise than at sight or on demand
11. Promissory notes, whether negotiable or non-
negotiable, except bank notes issued for
circulation (Section 179, Tax Code and RR 13-
04)
Treasury bills, ROP bonds, notes and similar financial
instruments issued by the government are debt instruments
subject to DST under Section 179 of Tax Code.
RATE AND All debt instruments, as enumerated above, shall be
APPLICATION liable to a DST equivalent to Pi on each P2oo, or fractional
part thereof,. of the issue price of such debt instruments. The
term "issue price" refers to the face value of the debt instrument.
Proportionate However, for debt instruments with terms of less than
computation one year, the DST to be collected shall be a proportional amount
in accordance with the ratio of its term expressed in number of
days to 365 days (the normal number of days in a year). This is
a significant deviation from the old law introduced by RA 9243.
RA 9243 allows the proportionate application of the DST in
cases where the debt instruments have a term of less than one
year. The old law prior to RA 9243 did not make any distinction
as to the term of the debt instruments.
Thus, a debt instrument with a maturity period of 6o
or 90 days was, under the old law, subject to the same amount
of.DST payable on a one-year debt instrument, ceteris paribus.
:With; the amendment, a debt instrument with less than one-
year term is subject only to an amount of DST proportional to
its term instead of the full amount due on a debt instrument
with a one-year (or a much longer) term. (It may be pointed
out that the previous rate of DST on debt instruments was at
varying rates of P1.50 on each P200, or fractional part thereof,
122 Chapter II
or Po.3o on each P200, or fractional part thereof, depending
on the name of the debt instruments.)
For example, a promissory note in the amount of
Pioo,000 issued with a term of 90 days from issue date is liable
to a DST of P123.29, computed as follows:
(Pi oo,0 00 ÷ P2 00) x P1 x (90 ÷ 365) = P123.29
If the debt instrument has a term of one year or longer,
the DST due is computed based on the issue price of the debt
instrument based on a one-year term. For example, a
promissory note issued at a price of Ploo,000 with a term of
- two years is liable to a DST of P500 computed as follows:
(P100,000 P 200) x P1 x (365 ÷ 365) = P500
promissory note to In the case of loan agreements or promissory notes
secure a loan issued to secure a loan, only one DST is due. It is imposed either
on the loan agreement or on the promissory note. The
amendment introduced by RA 9243 deleted a provision under
the old law that the DST shall be imposed on the document
that would yield a higher tax. While the previous provision was
intended as a safety net in cases where there are two or more
documents used to secure a loan, its implementation also posed
certain difficulties such as determining and proving which of
the documents would yield a higher DST.
letter of credit Likewise, in cases of importation involving several
procedures, namely: opening of a credit line by the client-
importer and approval by the bank as evidenced by a letter of
credit (LC); negotiation for payment of the same LC by the
beneficiary; and finally, when no payment is forthcoming for
which the bank causes the replacement of the foreign draft into
peso draft, the client-importer-entrustee avails of the trust line
that is actually covered and incorporated in the LC-TR through
the execution of a trust receipt (TR), only one DST is due. The
DST is due only for each availment of the credit line (BIR Ruling
No. DA-o97-99, February 15, 1999).
Banks 123
DST ON DEBT An important provision introduced by RA 9243 is the
INSTRUMENT clarification that the DST on all debt instruments shall be
IMPOSED ONLY ON imposed only on every original issue. The sale, exchange or
ORIGINAL ISSUANCE trading of debt instruments in the secondary market is not
subject to DST.
renewals Likewise, renewals of the debt instruments are not
subject to DST, if there is no change in the maturity date or in
the remaining period of coverage from that of the original
instrument. This provision puts an end to questions raised
under the old law on the taxability to DST of secondary transfins
or renewals of debt instruments.
The amendment is obviously designed to encourage
further rollovers of loan transactions, or make the market for
debt instrument active, which is essential to the growth and
development of the capital market.
BANK DEPOSITS A bank deposit drawing interest and having a specific
WITH SPECIFIC maturity date is subject to DST as a debt instrument. Pot as
MATURITY DATE long as the interest-bearing account is with a specific maturity
date, regardless of whether or not the interest is significantly
higher than regular savings deposit, the account is subject to
DST.
A deposit account is considered to be with a maturity
date and thus subject to the DST imposed on debt instruments
if both these conditions are met:
1. There is a predetermined or definite specific
maturity or end date to the deposit as agreed to
by the depositor and the bank.
2. In the absence of a specific maturity date, there
is a defined program of enjoyment of higher
interest rate or enjoyment of a privilege or
124 Chapter II
benefit (either monetary or in kind) to be
extended by the bank or financial institution if
the deposit is maintained for a defined period
of time.
RR 13-04, which implements the provisions of RA
9243, clarifies that the term "maturity date" not only refers to
the specific maturity dates agreed upon by the parties, but also
includes situations that more or less equate the account to
having a maturity date, like in situation (2) above. Note also
that the term "benefits" not only refers to monetary
considerations, such as interests paid in cash, but also includes
non-monetary benefits like rewards or giveaways given in kind.
SPECIAL SAVINGS With the broad definition of debt instruments, which
DEPOSIT ACCOUNTS include certificates or other evidences of deposits drawing
significantly higher interest than the regular savings deposits,
the contentious issue of the taxability of special savings deposit
accounts (SSAs) to DST is deemed resolved.
Common features An SSA (termed by some banks as a super savings
of an SSA account, a mega savings deposit account, a prime account, or a
gold account) is generally a deposit account that earns higher
interest comparable to interest given to a time deposit if a
certain minimum amount of deposit is kept with the bank for a
certain required period of time. It requires bigger minimum
amounts of deposits or placements as opposed to the regular
savings deposit accounts and pays higher interest rates. It does
not have a specific maturity date, but a minimum period to
keep the deposit with the bank is required.
Since the SSA is withdrawable any time and evidenced by
a passbook and not by a certificate of deposit or placement, the
account is considered by most banks as more akin to a regular
savings deposit and is therefore exempted from the payment of
Banks 125
DST. (Under the old law, regular savings deposit accounts, which
are normally evidenced by passbooks, payable on sight or on
demand are exempt from DST, while certificates of deposits not
payable at sight or on demand are subject to DST.)
The issue of the taxability of SSA to DST under the old
law was raised to the Court of Tax Appeals (CTA) several times
(substantial assessments issued by the BIR against the banks
were elevated to the CTA for resolution). In at least 12 cases
already decidedby the CTA and at least two by the CTA en banc,
the court affirmed the BIR's position that SSAs are indeed
subject to DST. It is interesting to note, though, that one of the
Justices issued a dissenting opinion on the en banc decision.
The dissenting opinion cited the differences between a time
deposit and an SSA and highlighted that it was only after
Congress amended Section iSo of the Tax Code under RA 9243
that SSAs became subject to DST. Prior to this, -Were was no
such provision and, pursuant to the hornbook doctrine in the
interpretation of tax laws, a tax cannot be imposed without clear
and express words for the purpose. All of these cases have been
appealed to the higher courts. As of this time, the Supreme
Court has not issued its final resolution on the matter.
Taxable features To resolve the issue once and for all, RA 9243 as
of an SSA implemented by RR 13-04 (December 23, 2004) specified the
instances when deposit accounts are liable to DST as follows:
1. Any deposit-bearinginterest, irrespective of the
nomenclature and whether covered by a
certificate, passbook or any other evidence of
deposit, where the interest is significantly
higher than the rate given to regular savings
deposits
2. All types of deposit accounts with a higher
interest yield than that given to savings deposit
or where the interest rate earned by such
deposit is reduced upon pretermination
126 Chapter II Banks 127
Significantly higher RR 13-04 provides that the interest rate of a particular
interest bank deposit account is considered significantly higher if it is
at least 5o% higher than the lowest interest rate given by that
bank or financial institution on any of its deposits, whether
savings or demand deposit or otherwise.
A regular savings/demand deposit is one that is
withdrawable upon demand by the depositor and earns interest
at the rate prevailing for a regular savings/demand deposit,
regardless of the amount deposited.
For purposes of determining the 5o% higher interest
rate, the reference is benchmarked on interest given by that
same bank to any of its savings or demand deposit accounts,
and not that given by another bank or that which is the
prevailing rate of savings deposit in the banking industry.
For example, if Bank A gives 2% as the lowest interest
on any of its savings deposits, any other deposit bearing an
interest rate of 3% is already subject to DST as a debt instrument
regardless of whether or not it is payable on sight or on demand.
Since the interest rate reference is compared with the other
deposit products of the same bank, it is possible that a demand
deposit bearing the same rate of interest may be considered
significantly higher in one bank but not in other banks, and
therefore subject to DST in one bank but not with another bank.
For example, the same rate of 3% given by Bank B to a demand
deposit is not subject to DST if the lowest rate of interest given
by Bank B to its depositors is 2.5%.
Likewise, as interest fluctuates, the determination of
significantly higher interest also fluctuates from time to time.
Thus, a savings account with the same rate of 3% may be subject
to DST at one specific point in time but not at another date if
the lowest rate of interest given by that bank is increased, for
example, to 2.5%.
All these features in the determination of whether or
not a deposit account is subject to DST make implementation
very tedious, costly and difficult to determine as it requires
constant monitoring of the accounts and tracking of the interest
movement.
For deposit accounts considered to bear significantly
higher interest rates, having a specific maturity date is net a
requirement. This is in contrast with the old law that says only
deposit accounts with specific maturity or those not payable
on sight or on demand are subject to DST.
Pretermination Any interest-bearing deposit account where the interest
rate earned by such deposit is reduced upon preterrnination is
considered to be one with a maturity, not payable on sight or
on demand, and therefore subject to the DST applicable on debt
instruments.
While an SSA is a savings account with no maturitysiste
agreed upon (as the depositor can withdraw anytime), there is
an agreement between the bank and the depositor that in ease
the SSA falls below the minimum deposit required, the interest
shall be reduced or adjusted to the level of the interest ghee to
regular savings deposit. The reduction, as claimed by many
banks, is not actually a reduction in the interest but is a pepalty
for failing to comply with the minimum deposit requirement.
Nevertheless, it is clear that the intention of RA 9243 is to
subject SSA to DST as a debt instrument to put an end to the
long outstanding issue on the taxability of SSA to DST.
Name or Regardless of the name or nomenclature given to the
documentation not deposit account (special savings, mega savings, prime account,
relevant gold account, maxima, etc.), and regardless of whether covered
by a certificate, a passbook or any other evidence of deposit (it
covers even scripless accounts), as long as it bears an interest
significantly higher than a regular savings deposit as discussed
above or if the interest is reduced when pre-terminated';, the
account is considered a debt instrument subject to DST.
128 Chapter II
Computation Considering that SSAs have no definite maturity date
of DST due and the depositor can withdraw anytime, the amount
maintained in the accounts may fluctuate every now and then.
The duration for which the balance of the account remains
constant cannot be determined with preciseness at the time of
the payment of the DST. Thus, it is very difficult to ascertain
the correct amount of DST to be paid.
The DST on debt instruments is based on the face value
and is apportioned in accordance with the term of the
instrument in relation to 365 days. This method of computation
presupposes a situation where the face value of the instrument
or account is fixed and it has a definite maturity date. However,
this method of computation is not feasible for SSAs, considering
that SSAs do not have a definite face value for a definite given
time, since the depositor is free to withdraw anytime and
therefore the amount maintained in the account fluctuates at
any given point in time.
A method specific for SSAs is needed. Would
approximation be allowed by the BIR? If so, what method of
approximation would be allowed? And how will it be carried
out? Would the face value be on the minimum balance required,
on the average daily balance, or on the initial deposit? Perhaps
an approximation of the monthly DST due and a final
adjustment at year-end will be allowed. Any deficiency in the
monthly computation will be adjusted at year-end (December)
without any imposition of interest or penalty, while any
overpayment will be allowed to be credited against the following
month's (January or succeeding) DST liabilities.
Bills of exchange
All bills of exchange or drafts in whatever currency,
including foreign bills of exchange, are liable to a unitary rate
of DST. Bills of exchange (between points within the
Banks 129
Philippines) or drafts, including acceptance of bills of exchange
for the payment of money drawn in a foreign currency but
payable in the Philippines, shall be subject to a DST of Po.3o
on each P200, or fractional part thereof, of the face value of
any such bill of exchange or draft. Foreign bills of exchange
and letters of credit drawn in, but payable outside, the
Philippines are likewise subject to the same rate of DST.
A bill of exchange is an unconditional order in writing
addressed by one person to another, signedby.the person giving
it, requiring a person to whom it is addressed to pay on demand
or at a fixed or determinablefuture time a sum certain in money
or its equivalent. A check, for example, is a demand bill of
exchange. A bill of exchange drawn in one country upon another
country is a foreign bill of exchange (Black 1968). A draft is
actually a bill of exchange but is normally used if drawn on a
bank.
Mortgages and pledges
Mortgages or pledges of lands, estate, or property, real
or personal, heritable or movable, whatsoever, where the same
shall be made as a security for the payment of any definite and
certain sum of money are subject to DST (see Table 2.5 for the
rate).
In cases where the mortgage is made as a security for
the payment of a fluctuating account or future advances without
a fixed limit, the DST is computed on the basis of the amount
actually loaned or given at the time of the execution of the
mortgage. However, if subsequent advances are made on such
mortgage, additional DST shall be paid and shall be computed
on the basis of the amount advanced or loaned at the rates
earlier quoted. If the full amount of the loan or credit granted
under the mortgage is specified in such mortgage, the DST
earlier quoted shall be paid and computed on the basis of the
130 Chapter II
full amount of the loan or credit granted (Section 195, Tax
Code).
Foreclosures and sales or conveyances of ROPOA
Sales or conveyances of ROPOA are subject to DST
similar in rate to that imposed on sales and conveyances of real
properties, that is, P15 for every P1,000, or a fractional part
thereof, based on the selling price or consideration received or
the fair market value as determined by the BIR, whichever is
higher. Sales or conveyances of ROPOA to an SPV in
transactions covered by the SPV Act are exempt from DST (see
discussion on SPV Act).
Similarly, foreclosure by the bank of the real properties
mortgaged is subject to the same rate of DST but payable only
within five days of the following month from the expiration of
the redemption period allowed under existing laws, that is, one
year from the issuance of the certificate of sale (COS) in the
case of individual mortgagor or, in the case of juridical persons,
before the registration of the certificate of foreclosure sale with
the applicable Register of Deeds, which in no case shall be more
than three months after foreclosure. The amount of DST is
based on the bid price of the highest bidder.
If the property foreclosed is redeemedwi thin the period
of redemption allowed by law, the transaction is subject only
to a DST of P15 (for the notarial acknowledgment) because no
land or realty is sold or transferred for a consideration.
Banks 131
Documents and transactions
exempt from DST
With the promulgation of RA 9243, a number of
transactions and/or documents that were subject to DST under
the old law have been exempted from DST (Section 199, Tax
Code). Most of these exempted transactions and documents
pertain to those normally entered into by financial institutions.
This is designed to remove the barrier caused by the imposition
of heavy transaction taxes on the flow or movement of capital,
which hampers the growth and development of the capital
market.
The folloWing documents/transactions are exempt from
DST:
1. Loan agreements or promissory notes (PN), the
aggregate of which does not exceed P250,000
RA 9243 retains the DST exemption of lean
agreements or promissory notes, the aggregate
of which does not exceed P250,000 or any such
amount as may be determined by the Secretary
borrower must be an of Finance. To be exempt, however, the loan or
individual PN must be executed by an individual (not a
corporation) for his purchase on installment for
his personal or family use (and not for business,
resale, barter or hire) of a house, lot, motor
vehicle, appliance or furniture.
It may be noted that under the old provision
prior to RA 9243, this exemption was merely
an adjunct to the major provision on the liability
of loan agreements to DST under then Section
18o (now Section 179) of the Tax Code. RA 9243
now puts the exemption under the heading of
transactions exempt from DST, thereby lending
132. Chapter II
significance to the exemption given on this
provision. In addition, the amendment allows
the Secretary of Finance to adjust the exempt
amount in accordance with a relevant price
index but not to exceed 10% of the current
amount, which shall remain in force for at least
three years.
2. Sale, barter or exchange of shares of stock listed
and traded through the local exchange for a
period of five years from the effectivity of RA
9243, which is March 20, 2004
This exemption privilege expires on March 20,
2009.
transfers and renewals 3. Assignment or transfer of any mortgage, or the
renewal or continuance of any agreement,
contract, charter or any evidence of obligation
or indebtedness, if there is no change in the
maturity date or remaining period of coverage
from that of the original instrument
Assignments or transfers of mortgage, or the
renewal or continuance of any contract or
evidence of obligation, are generally subject to
DST at the same rate as the DST imposed on
the original document (Section 198, Tax Code).
However, such transfers are exempt if: (a) there
is no change in the maturity date, or (b) there
is no change in the remaining period of
coverage from that of the original documents.
Thus, the renewal or transfer is subject to DST .
only if there is a change in the maturity date or
the remaining period of the original contract.
A mere change of holder, change in obligee or
Banks 133
obligor, mortgagee or mortgagor does not
subject such assignment or transfer to DST.
4. Fixed income and other securities traded in the
secondary market or through an exchange
secondary trading of The exemption given to fixed income and other
fixed income securities securities shall refer exclusively to debt
instruments as enumerated or defined in RR
13-04.
Fixed income securities such as bonds, notes
or any other debt instruments providing fixed
income either in the form of interest or
equivalents are exempt from DST when traded
in the secondary market. This is also apparent
in Section 179 of the Tax Code, which limits the
imposition of DST on debt instrument to
original issue only.
The objective of the exemption is to reduce
transaction costs and encourage trading in the
secondary market to promote active trading and
flow of capital.
5. Derivatives, including repurchase agreements
and reverse repurchase agreements
Derivatives
The specific provision for the exemption of
derivatives under RA 9243 puts to rest the
issues on its taxability to DST. Prior to RA 9243,
the BIR issued conflicting opinions on whether
or not derivatives are subject to DST. In some
rulings, the BIR opined that derivatives are not
subject to DST since these are not loan
agreements, the principal being only notional.
134 Chapter II Banks 135
limitation on exemption
6. Interbranch or interdepartmental advances
In other rulings, these were subjected to DST,
and in some other rulings, the BIR made a
distinction on the type of derivative such that
only interest rate swaps are exempt from DST.
RA 9294 now clarifies that derivatives of
whatever form, including swaps (interest rate
swap or foreign currency swap), options,
futures, swaptions or any other variation of
derivatives, are exempt from DST.
RR 13-04 provides, however, that derivatives
exempt from DST shall refer only to those issued
by entities duly licensed by the BSP to issue and
trade in derivatives and whose issuances are
duly authorized by the BSP.
Repurchase and Reverse Repurchase
Agreements
The exemption of repurchase and reverse
repurchase agreements is introduced by RA
9243. Prior to that, repurchase and reverse
repurchase agreements were subjected to DST
as debt instruments, these being included in
the definition of deposit substitutes that are
taxed, for DST purposes, as debt instruments.
The reason for its exemption (including that of
derivatives) may lie in the recognition that the
underlying instrument or document has already
been subjected to DST.
within the same legal entity
This is also a new amendment introduced by
RA 9243, which exempts interbranch and
interdepartmental advances.
"within the same Note, however, that the exemption applies tithe
legal entity" interbranch or interdepartmental advances are
within the same legal entity but not when they
are from a different entity, such as an affiliate
or a subsidiary. This provision, therefore, gives
an advantage to a branch as compared to a
subsidiary or an affiliate, especially as regards
foreign banks. The advances of a Philipphie
branch from its home office are not subject to
DST, while the advances of an affiliate or a
subsidiary from its parent company are subject
to DST.
The existing regulations of the BIR imposing a
DST on intercompany loans and advances are
therefore not deemed repealed by RA 9243
insofar as the regulations relate to loans and
advances between two separate legal entities
such as a subsidiary and its parent company.
7. All forbearances arising from sales or service
contracts, including credit card and trade
receivables, executed by the seller or service
provider
8. Bank deposit accounts without a fixed term or
maturity period
The exemption from DST of bank deposit
accounts without a fixed term or maturity
period has been limited by RR 13-04 only to
deposit accounts that do not qualify as debt
instruments, more specifically those accounts
with significantly higher interest than a regular
savings deposit. Thus, an account that doer not
have a fixed term or maturity, but draws an
interest that is significantly higher than a
regular savings deposit, is still subject to DST.
136 Chapter II
9. All contracts, deeds, documents and
transactions related to the conduct of business
of the BSP
This is in recognition of the need to preserve
the autonomy of the BSP, pursuant to its
charter. [Refer to RA 7653 (June 14, 1993) and
the Constitution (Article XII, Section 20).]
10. Transfer of property pursuant to the provisions
of Section 40(C)(2) of the Tax Code referring to
tax-free exchanges of properties
The exemption, however, is only with respect
to DST imposed on the deed of transfer of the
property. The shares of stock issued in exchange
of the property are still subject to the DST
imposed on the original issuance of shares of
stocks under Section 174 of the Tax Code.
11. Interbank call loans (IBCLs) with a maturity
period of not more than seven days to cover
deficiency in reserves against deposit liabilities,
including those between or among banks and
quasi-banks
For the exemption to apply, the IBCLs must
have a maturity of not more than seven days
and must be made strictly to cover deficiency
in reserves against deposit liabilities.
An exemption from the 2o% final tax on the
interest income derived from an IBCL is
similarly provided under the Tax Code. (See
discussion on withholding tax on income of
deposit substitutes.) The maturity period as a
requirement for exemption, however, is
Banks 137
reduced to only five days (not seven days). Thus,
an IBCL with a maturity period of six days, for
example, is exempt from DST, but the interest
income derived therefrom is still subject to the
2o% PINT. In both instances, the exemption
applies only if the IBCL is used to cover
deficiency in reserves against deposit liabilities.
(See also discussion under IBCLs.)
Liability of OBUs and FCDUs to DST
Is DST covered by the tax exemption of offshore income
of OBUs and EFCDUs under RA 9294?
DST not a tax on As worded, the exemption from all taxes is granted to
income "income derived by an OBU or a depository bank under the
expanded foreign currency deposit system from foreign
currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks including
branches of foreign banks that may be authorized by the BSP
to transact business with foreign currency deposit units and
other depository banks under the expanded foreign currency
deposit system." (underscoring supplied)
DST not covered by The tax exemption, therefore, applies only to taxes
exemption imposed on income such as income tax or gross receipts tax.
DST is not a tax on income but it is a tax on the document or
the transaction, the same nature as an excise tax. Although DST
is included among the taxes covered by the exemption under
PD 1035 as implemented by RR 10-76, the principle of
legislative re-enactment (see section on BPRT in this chapter)
may not be applied considering the clear provision in the new
law that only taxes on income are covered by the exemption.
Since the DST is not a tax imposed on income but on
the document or the transaction, then it may not be covered by
138 Chapter II
the "exempt from all taxes" provision that clearly applies only
to taxes on income. Again, the BIR rules are not clear regarding
this matter. It may be that the BIR will adopt a lenient position
similar to RR 10-76 by including DST within the coverage of
the exemption considering the rationale behind the exemption
of OBUs and FCDUs.
Transactions or documents pertaining to the onshore
income subject to a to% final tax and all other income subject
to the 35% regular income tax are also subject to DST at the
rates depending on the nature of the transactions, unless
otherwise specifically exempt.
Special rules on
payment and filing of DST
Use of metering machines
Under existing regulations, the DST return should be
filed, and the tax thereon paid with the BIR, within five days
after the close of the month, when the document subject to the
DST is made, signed, issued, accepted or transferred [Section
5, RR 06 - 01 (July 31, 2001), and Section 2, RR 05-04 (April
26, 2004)].
Unlike other taxes, DST may be paid by way of purchase
and actual affixture of the required stamps on the document,
or by imprinting the stamps through a documentary stamp tax
metering machine [Section 200(D), Tax Code]. Banks, however,
because of their voluminous transactions subject to DST, are
required to pay the tax through a metering machine.
The use of metering machines is the practical
alternative to the time-consuming method associated with the
Banks 139
affixture or the use of loose stamps. On October 16, 1998,
Revenue Memorandum Order (RMO) No. 83-98 was issued
relative to bank's use of metering machines with encryption as
a mode of paying DST. In 2001, the use of an online electronic
DST imprinting machine was made mandatory for certain
industries including all banks, quasi-banks or NBFIs and
finance companies.
An online electronic DST imprinting machine is a
device capable of imprinting the value of the stamp tax and
other data on the taxable document, with remote loading and
resettling feature. It has a built-in modem that enables users
to load/purchase the stamp tax value through an online set-up
or electronic data transmission with the BIR, thereby enabhng
the latter to monitor actual usage or stamp consumption of the
users (RR 15-01, October 16, 2001).
Notwithstanding the above rules, in the case of DST on
sale of real property where the bank is one of the parties to the
sale, the DST still has to be paid to an accredited agent bank
(AAB) within the jurisdiction of the revenue district office
(RDO) where the real property is located.
Banks as statutory payors of DST
Pursuant to RR o9-00 (August 31, a000), whenever a
bank (and other financial institutions) is one of the parties to a
taxable document, the bank shall be responsible for the
remittance of the DST due to the BIR regardless of who will
bear the burden of paying the tax.
If one of the parties to the taxable transaction is exempt
from DST, the other party who is not exempt shall be directly
liable for the tax (Section 173, Tax Code; see also RR o9-0o).
In case the bank is the exempt entity, it shall nevertheless remit
the tax collected from the other party as a collecting agent for
140 Chapter II
the government. The bank, which is constituted as an agent of
the government for the collection of the tax, shall issue an
acknowledgment receipt in respect of the DST collected from
the other party and remit the tax to the BIR in accordance with
the existing rules on the payment and filing of DST returns (RR
og-oo).
RULES SPECIFIC
TO CERTAIN TYPES OF BANKS
Rural Banks
To achieve countryside development, the government
gave rural banks a package of incentives. More specifically, RA
7353 (otherwise known as the Rural Banks Act of 1992, April
2, 1992) provides that all rural banks organized under its laws
shall be exemptfrom the payment of all taxes, fees and charges
of whatever nature and description, except the corporate in-
five=year tax incentives come tax and local taxes, fees and charges, for a period of fine
years from the date of commencement of their operations.
Pursuant to RR 16-93 (April 22, 1993), which
implemented the provisions of RA 7353, the date of
commencement of operations refers to the date when the rural
bank was registered with the SEC. For rural banks already in
operation as of the date of approval of RA 7353, the five-year
period shall run from the date of approval of RA 7353. Since
RA 7353 became effective on June 9, 1992, the availability of
incentives provided by said law to rural banks that were already
in operation at the time of the promulgation of RA 7353 already
expired on June 9, 1997.
Banks 141
A number of proposals are being initiated in Congress
to revive the tax incentives for these rural banks even after the
five-year period in view of their significant contribution to
countryside development, i.e., by making credit available and
accessible in rural areas at reasonable terms.
Tax incentives
The tax exemption given to rural banks include all taxes
except corporate income tax and local taxes. Specifically, the
tax exemption does not cover the following taxes (RR 16-93):
1. Regular 35% corporate income tax, MCIT and
the final taxes imposed on income
2. 20% FWT on interest income from Philippine
currency bank deposits and yield or any other
monetary benefit from deposit substitutes, trust
funds and similar arrangements and royalties
derived from sources within the Philippines,
and the 7.5% final tax on foreign currency
deposits
3. Creditable expanded withholding tax on sales,
exchanges or transfers of real properties,
whether classified as ordinary or capital assets
consummated on or after January 1, 1990, as
well as any other CWT imposable on its income
under the withholding tax regulations
4. Capital gains tax (CGT)
5. All other taxes imposed on income under Title
II of the Tax Code
142 Chapter II
Impliedly, taxes that are not covered by the
enumeration above are included in the coverage of the tax
exemptions granted to rural banks, including GRT and DST.
The DST law, however, requires that in case one of the
parties to the agreement is exempt (in this case, the rural
banks), the other party to the transaction who is not exempt
becomes liable to the tax. The client of the bank, therefore,
becomes liable to DST on the document. As a bank, however, it
is still liable to remit DST to the BIR, not as a payor of the tax
but as a collection agent of the government with respect to the
amount collected from the client who answers for the DST
liability. This is in consonance with the rule that banks are the
statutory payors of DST in any transaction to which it is a party
(see discussion on special filing of DST).
There are also transactions of rural banks that are
specifically exempt from DST. Thus, since it is an exemption
on the transaction, none of the parties are liable to the tax.
For instance, under RA 9353, loans extended by rural
banks in amounts not exceeding P50,000 are exempt from DST.
Any portion of the loan in excess of P50,000, or such amounts
as the Secretary of Finance may prescribe upon the
recommendation of the Monetary Board, is subject to DST.
On the other hand, under the Tax Code, loans and
promissory notes in amounts not exceeding P250,000 are
likewise exempt if the loan or promissory note is executed by
an individual (not a corporation) for his purchase on installment
for his personal or family use and not for business, resale, barter
or hire of a house, lot, motor vehicle, appliance or furniture.
The same exemptions apply to promissory notes and time
deposits as these are instruments covered by the same Section
179 of the Tax Code pertaining to loan agreements (BIR Ruling
No. DA-183-04, April 6, 2004).
Banks 143
Foreclosure sales subject to two-year redemption
period
Under RA 720 (June 6, 1952), as amended by RA 5939
(June 21, 1969), homestead or free patent land mortgaged and
subsequently foreclosed by a rural bank may be redeemed
within two years (generally, the redemption period is one year)
from the following dates: (1) the date of foreclosure, if the
property is not covered by a Torrens title; or (2) from the date
of registration of the sheriff's certificate of sale of such
foreclosure, if the property is covered by a Torrens title.
The CGT on the foreclosure sales is therefore due within
3o days from the lapse of the two-year redemption period.
However, the DST on the transaction is payable sin or before
the fifth day of the month following the execution of the final
deed of sale made by the sheriff (BIR Ruling No. 010-05, August
2, 2005).
Thrift Banks
Tax incentives
To promote thrift or savings consciousness, the
government granted thrift banks tax incentives similar to those
given to rural banks under RA 7906 (otherwise known as the
Thrift Banks Act of 1995, February 23, 1995). Under this law,
thrift banks were granted exemption from payment of all taxes,
fees and charges of whatever nature and description, e*eept
the corporate income tax and local taxes, fees and charges for a
period of five years from the date of the commencement of
operations or from the date of the effectivity of said RA for
existing thrift banks.
144 Chapter II Banks 145
However, RA 8424 (otherwise known as the Tax
Reform Act of 1997), which was issued in December 1997,
removed these tax exemptions given to thrift banks. RA 8424,
however, gave a grace period until December 31,1999, for thrift
banks to enjoy the tax exemptions. Hence, effective January 1,
2000, all thrift banks, whether in operation as of that date or
thereafter, were no longer entitled to the tax exemption
privileges provided by RA 7906. Thereafter, all thrift banks
became subject to taxes, fees and charges in the same manner
and at the same rate as banks and other financial intermediaries
(Section 7, RA 8424).
Thrift banks have been questioning the government's
withdrawal of their tax privileges by way of RA 8424 in a
number of forums, citing, among others, the contention that
the withdrawal is inconsistent with the thrust of RA 7906 to
promote thrift banking.
Credit Cooperatives and Cooperative Banks
Nature of business
A cooperative is an association of persons with a
common bond of interest who have voluntarily joined together
to achieve a common social or economic end (Article 3, RA
6938, The Cooperative Code of the Philippines). It is a voluntary
organization of people who have agreed to pool their resources
together in order to undertake an economic enterprise for the
purpose of meeting their common needs. The people
themselves democratically manage and control the cooperative,
and share in the economic benefits on the basis of participation
and patronage. The creation and growth of cooperatives in the
country is encouraged by the government since they serve as
practical vehicles to promote self-reliance and harness people
power to attain economic development and social justice
(Article 2, RA 6938).
There are two distinct types of cooperatives in the
financial mainstream: the cooperative banks and the credit or
multipurpose cooperatives. .
Cooperative banks provide financial and credit services.
Credit cooperatives promote thrift and create funds to grant
loans for productive and provident purposes. Cooperatives are
under the regulation and supervision of the Cooperative
Development Authority (CDA), which is the government entity
tasked to oversee the growth and development of the
cooperatives. In addition to, and on account of, the nature of
their business operations, cooperative banks are also under the
regulation and supervision of the BSP (RA 8791). ,
Currently, there are proposals to relax the traditional
requirements imposed by the BSP on other banks as regards
their application on cooperative banks since a cooperative bank
is more of a self-help entity and is generally operated for the
requirements of its members.
Taxation
Cooperatives enjoy a number of tax exemptions. The
extent of taxes covered by the exemption depends on whether
the cooperative deals with members only, or if it deals with
both members and nonmembers. If it deals with both members
and nonmembers, the tax exemption also differs depending on
the amount of the cooperative's accumulated reserves.
INCOME TAX All cooperatives, regardless of classification, are exempt
from the payment of income taxes for a period often years from
146 Chapter II Banks 147
the date of registration with the CDA, provided that at least
25% of the net income of the cooperatives is returned to
members in the form of interest or patronage. After the ten-
year period, any cooperative liable to income tax (such as
cooperatives dealing with members and nonmembers with
accumulated reserves and undivided net earnings of more
than Pio million) shall compute its income tax liability based
on the net surplus arising from transactions with nonmembers
only after deducting the amounts for statutory reserve funds.
It may also be worth noting that a cooperative is entitled
to a limited or full deduction of donations made to duly accredited
charitable, research and educational institutions andreinvestment
ti
in socio-economic projects within its area of operation.
VAT AND GRT The exemption from VAT of credit and multipurpose
cooperatives duly registered with the CDA is not only contained
in RA 6938 but is also specifically mentioned in RR 9337.
credit cooperatives Under Section 109(M) of the Tax Code, as amended by
exempt from VAT RA 9337, the gross receipts from lending activities to both
members and nonmembers by credit and multipurpose
cooperatives duly registered with CDA are exempt from VAT.
Note that the exemption under RA 9337 refers to transactions
of the credit or multipurpose cooperative with both members
and nonmembers. Under the law prior to RA 9337, the VAT
exemption pertained only to transactions with members but
not with nonmembers.
The exemption from VAT, however, refers only to VAT
that a credit and multipurpose cooperative is directly liable to,
i.e., VAT imposed on its income from lending activities. It is
not exempt from VAT passed on to it by sellers of goods and
services on its purchases.
Surprisingly, while credit and multipurpose
cooperatives are clearly exempt from VAT (which is the
business taxation applicable to lending investors) under RA
9337, there is no similar provision for the exemption of
cooperative banks from GRT (which is the business taxation
applicable to banks) under RA 9238. Neither is there a clear
statement subjecting it to GRT. RA 9238, the law re-imposing
GRT on financial institutions, is silent on this matter.
In light of this, the broad exemption provision granted to
cooperatives under the CDA law may be referred to for paidance.
cooperative banks Under the CDA law, if the cooperative transacts with
exempt from GRT members only or with members and nonmembers but with
accumulated reserves and undivided net earnings of not more than
Pio million, it is exempt from both income and sales taxes (sales
tax was replaced by GRT in the case of banks). For cooperabves
dealing with both members and nonmemberq but with
accumulated reserves and undivided net earnings of more that
Pio million, the transactions with nonmembers shall be subject
to regular taxes after the lapse of the ten-year exemption period.
Thus, based on the CDA law, cooperative banks are
exempt from GRT except on income derived from transactions
with nonmembers (where the cooperative bank deals with both
members and nonmembers and has accumulated reserves of
more than Pio million) after the lapse of the ten-year period of
exemption.
TAX EXEMPTION Cooperatives, including credit cooperatives and
COVERAGE cooperative banks, dealingwith members only are exempt from
any government taxes or fees (Article 61, RA 6938). The
exemption covers the following taxes to which cooperatives are
directly liable (RR 20-01, November 12, 2001):
1. Income tax on income from operations
However, when these cooperatives distribute
interest on capital, such interest is taxable to
148 Chapter II
the recipient member who should declare such
interest as a taxable income in his income tax
return (RMC 48-91, June 18, 1991). The
distribution, nonetheless, is not subject to
withholding tax (BIR Ruling No. DA-o75-o5,
March 9, 2005).
2. VAT
Gross receipts from lending activities with
members and nonmembers by credit or
multipurpose cooperatives duly registered and
in good standing with the CDA with members
and nonmembers are exempt from VAT
[Section 109(M) as amended by RA 9337• This
is a new provision introduced by RA 9337. Prior
to this, only lending activities transacted with
members were exempt from VAT.
Cooperative banks are also exempt from GRT.
3. 3% percentage tax
4. Donor's tax on donations to duly accredited
charitable, research and educational
institutions and reinvestment in socio-
economic projects within the cooperative's area
of operations
5. Excise tax
6. DST, provided that the other party to the taxable
document/transaction who is not exempt
should be the one directly liable for the tax
7. Annual registration fee
8. Taxes on importation of machinery, equipment
and spare parts to be used by the cooperative,
Banks 149
provided that these are not locally available as
certified by the Department of Trade and
Industry (RA 6938)
Not more than P10 Cooperatives dealing with members and nonmembers
million with accumulated reserves and undivided net earnings of not
more than Pio million are also exempt from all taxes of
whatever name and nature in the same manner as those dealing
with members only. Thus, any income derived from
transactions with members and nonmembers is exempt from
all government taxes and fees including income tax, VAT and
GRT on all dealings with members and nonmembers.
More than P10 million Cooperatives dealing with both members and
nonmembers with accumulated reserves and undivided net
earnings of more than Pio million are exempt from the
following taxes for a period of ten years from the date of
registration with the CDA (RR 20-01):
1. Income tax, provided that at least 25% of its net
income is returned to its members in the form
of interest and/or patronage refund
2. VAT, GRT, the 3% percentage tax (if gross sales
do not exceed P1.5 million), and the annual
registration fee.
Under RA 9337, cooperatives—whether dealing with
members only, or with both members and nonmembers—are
exempt from VAT without any period of limitation. Thus, the
ten-year limitation period does not apply.
After the ten-year period of exemption, cooperatives
in this category shall be subject to the regular taxes and fees on
transactions with nonmembers.Its transactions with members,
however, remain exempt from the above taxes.
150 Chapter II
TAXES NOT The following taxes are not covered by the exemption
COVERED BY given to cooperatives (RR 20-01):
EXEMPTIONS
1. 2o% final tax on interest from Philippine-
currency deposits, yield from deposit
substitutes, trust funds and similar
arrangements, rentals and royalties derived
from sources within the Philippines, and prizes
and winnings.
These items of income (passive income) are not
derived from an economic activity of the
cooperative (RMC 48-91 and BIR Ruling No.
123-91, June 26, 1991).
2. 7.5% final tax on foreign-currency deposits
3. CGT on sales or exchanges of real property
classified as capital assets or shares of stock
However, transfer of properties by a credit
cooperative in favor of its member-beneficiaries
in the process of returning the members'
contributions is not subject to CGT, to
withholding taxes on the sale or transfer of
capital assets, and to DST. This is because the
transfer is without consideration and is merely
a formality to finally effect the transfer of the
properties to the member-beneficiaries who
actually own the same through the cooperative.
The transaction of transferring the ownership
of properties is merely an act of returning the
contribution of the member-beneficiaries. The
notarial acknowledgement to the deed of
conveyance is only subject to a DST of P15 (BIR
Ruling No. DA-oo9-99, January 7, 1999).
Banks 151
4. DST on transactions with nonmembers if the
accumulated reserve and undivided net
earnings exceed Pio million
5. VAT on purchases of goods and services
6. All other taxes, unless otherwise specified
NON-TRANSFER- All tax-free importations by cooperatives (including
ABILITY OF credit cooperatives and cooperative banks) shall not be
TAX-FREE transferred to any person until after five years. Otherwise, the
IMPORTED GOODS cooperative and the transferee or assignee shall be solidarily
liable to pay twice the amount of the tax and/or the duties due
upon importation (RR 20-01).
LIABILITY TO Cooperatives, regardless of classification, are
WITHHOLDING considered withholding agents of the BIR and are required to
TAXES file the withholding tax returns and remit the taxes withheld
by them on income payments subject to withholding tax.
TRANSACTIONS All cooperatives, regardless of the amount of
WITH BANKS AND accumulated reserves and undivided net savings, are exempt
INSURANCE from the payment of local taxes and taxes on transactions with
COMPANIES banks and insurance companies.
INDIVIDUAL Members of cooperatives are liable to pay all the taxes
MEMBERS NOT due on their income as required under the Tax Code, including
COVERED BY the tax on earnings derived from their capital contribution with
EXEMPTION the cooperative.
152 Chapter II
EXAMINATION OF Duly authorized internal revenue officers are not
BOOKS BY THE BIR precluded from examining the books of accounts and other
accounting records of cooperatives enjoying tax exemptions.
NSSLAs and BLAs
Nature of operations
Nonstock savings and loan associations (NSSLAs) and
building and loan associations (BLAs) provide access to funds
by extending loans, but they cater only to the financial
requirements of their members (RA 8367, otherwise known as
the Revised Non-stock Savings and Loan Association Act,
October 21, 1997, and RA 337, July 24, 1948).
An NSSLA is a nonstock, nonprofit corporation engaged
in the business of accumulating the savings of its members and
using such accumulations to service the needs of households
by providing long-term financing for home building and
development and for personal finance (Section 3, RA 8367).
An NSSLA confines its membership to a well-defined group of
people such as employees, officers and directors of one
company, government employees belonging to the same
department or branch of the government, and retirees and the
immediate members of their families up to the second degree
of consanguinity or affinity
On the other hand, a BLA is a corporation whose capital
stock is required or permitted to be paid by its stockholders in
regular, equal, periodical payments and whose purpose is to
accumulate the savings of its stockholders, to encourage thrift
and home building, and to loan funds to its stockholders
(Section 39, RA 337).
Banks 153
Both NSSLAs and BLAs are generally operated as
mutual savings and loan associations to servicethe credit needs
of their members. For tax purposes, these are considered
nonstock mutual savings banks. For regulatory purposes, both
are under the supervision of the BSP.
Taxes
NSSLA As a mutual savings bank not having a capital stock
represented by shares, an NSSLA is exempt from income tax
with respect to income received by it as such (Section 3o, Tax
Code). Its tax exemption includes the 2o% final tax imposed
on interest income on deposits with banks. Interest earnings
on deposits of members with the . NSSLA, as well as the share
of its members in the net income, are likewise exempt from
income tax (RA 8367, October 21, 1997; BIR Ruling No. DA
141-98, April 16, 1998).
exemption of interest The clear provision of the law under RA 8367, which
earnings and share became effective on October 21, 1997, for the exemption of
of members interest earnings and share of members in the net income of
the NSSLA reversed the earlier rulings of the BIR and the CTA
[BIR Ruling No. 115-87, April 24, 1987, and Caltex
(Philippines), Inc. v. Commissioner of Internal Revenue, 2000]
that dividends paid to members as their share in the profits of
the NSSLA, which may be based on the amount of deposits
maintained by members with the NSSLA, are subject to an FWT
of io% as a dividend income received by a resident individual
from a domestic corporation.
Income from Any income derived from any of an NSSLA's properties,
activities conducted real or personal, or any activity conducted for profit, regardless
for profit is subject of the disposition thereof, is subject to income tax (RA 8367).
to tax
However, sales of foreclosed properties used as
collaterals to secure the loans of the members are not subject

154 Chapter II
to income tax, CGT and withholding taxes since they are not
conducted as separate activities for profit but are transactions
made in the ordinary or normal course of an NSSLA's business
as a savings and loan association (BIR Ruling 017-01, May 9,
2001). Such sales are, however, subject to DST.
Thus, if the NSSLA disposes of its capital asset other
than the foreclosed assets (such as lands or buildings, which
are not actually used in the conduct of the association's
business), a final tax of 6% is imposed on the basis of the gross
selling price or fair market value determined pursuant to the
pertinent provisions of the Tax Code [Sections 6(E) and
27(D)(5), Tax Code]. If the NSSLA disposes of its shares in a
domestic corporation, it shall be liable to any of the following
taxes: (1) V2 of 1% of the gross selling price or gross value in
money of the shares of stock, if said shares are listed and traded
LIABILITY TO GRT
through the stock exchange [Section 127(A), Tax Code]; or (2)
5% if the net capital gains do not exceed Ploo,000, and 10%
for amounts in excess of Pioo,000 if the shares of stock are
not sold or disposed through the local stock exchange [Section
27(D)(2), Tax Code].
BLA Similar to an NSSLA, a BLA may also be classified as a
mutual savings bank not having a capital stock represented by
shares, which is exemptfrom income tax with respect to income
it receives as such, pursuant to Section 30 of the Tax Code.
tax exemptions under In addition, a wider coverage of tax exemption is also
RA 8763 provided under RA 8763. BLAs guaranteed by the Home
Guaranty Corporation (HGC) are exempt from all taxes,
including those imposed on its franchises, capital, reserves,
surplus, and its loans, receipts and incomes (Section 20, RA
8763; see also BIR Ruling Nos. 002-03, February 12, 2003,
and 400-03, November 6, 2003). The provisions of RA 8763
are broad and comprehensive enough to cover almost any kind
of tax.
Banks 155
It is for this reason that the BIR clarified its previous
ruling under BIR Ruling No. 002-03, as rpodifiedby BIR Rang
No. 400-03, to the effect that a BLA is exempt not only from
income tax, but also from taxes on its franchises, capital,
reserves, surplus, loans, receipts and incomes.
Income received by members of NSSLAs from the
association is exempt from income tax, as explicitly worded
under RA 8367. The same exemption is not, however, clearly
granted to members of BLAs. Thus, in order for members of
BLAs to avail of the exemptions given to NSSLAs under RA
8367, the association may have to convert to an NSSLA.
NSSLAs and BLAs (except perhaps those :guaranteed
by the HGC) are considered mutual savings banks that are
classified as NBFIs under the BSP Manual of Regulations. As
NBFIs, they are generally subject to GRT on income derived
from their operations, unless otherwise exempted under
specific rules. BLAs that are guaranteed by the HGC are exempt
from GRT.
Trust Companies
Nature of business
A trust company acts as a trustee or administrator of
a trust or trusts, or holds property in trust or on deposit, for
the use or benefit of the trustor, its beneficiaries or other
persons (Section 79, RA 8791). It is a company organized for
the purpose of accepting and executing trusts and acting as
trustee of a fund whether under will or guardianship.
156 Chapter II Banks 157

An institution incorporated or authorized to engage in
trust business may also engage in other fiduciary business and
investment management activities.
Investors generally avail of the services of trust
companies to access higher-yielding investment instruments
and to achieve investment diversification. Trust companies may
also be used to protect a trust property, especially if the
beneficiary is a minor.
company. It is taxable to the trust fund as a separate taxable entity
in the case of irrevocable trust, or to the investor or the owner of
the fund as part of its taxable income in the case of revocable trusts.
(See also discussion on taxation of and CM.)
The income of the trust fund from its various investments
is subject to the same withholding taxes applicable to investment
income, in general, and the rate of withholding tax depends on
the nature of the income and the status of the recipient.

Any income of the fund that is not subject to FWT is

Regulation and supervision
taxable to the trust fund (for irrevocable trust) or to the trustor
(for revocable trusts). The income is required to be included in
the income tax return- of either the trust fund or the trustor as
While trust companies may be set up as separate
part of the incorhe subject to theregular .indonle tax.
business units, many of them are, in practice, part and parcel
of an integrated banking or financing operation. Thus, it is not
Any distribution of the income of a revocable trust to the
uncommon to see trust companies co-existing with other
trustors by the trustee is not a taxable transaction subject to tax.
banking operations or services.

Trust companies, whether operating as a separate

Administrative requirement for trust entities
business unit or as part of a bank's operations, are subject to
the supervision and regulation of the BSP (Section 79, RA 8791).
The Tax Code requires any person acting in any
fiduciary capacity (such as trustees, administrators, guardians,
Taxes
executors, receivers and conservators) to file, in duplicate, a
return of the income of the trust for whom they act (Section 65,
Tax Code). Any entity designated to undertake a fiduciary
The income derived by trust entities, which consists of
function must report the income and pay the tax due on the
fees and commissions, is subject to the same taxes (income tax,
income of the trust represented by it. They shall be entitled to
MCIT, GRT or VAT, DST and withholding taxes) imposed on
reimbursement on the amount of taxes paid by them on behalf
banks or other NBFIs. A trust company operating as a stand-
of the principal or beneficiary (Section 66, Tax Code).
alone entity is subject to the same taxes imposed on NBFIs (see
Chapters IV and V). The trust operations of banks are, on the
Note that this requirement may apply only to irrevocable
other hand, subject to taxes imposed on the bank.
trust arrangements but not to revocable trusts. An irrevocable trust
is considered a taxable person separate from the owner of the fund
income of trustee vs. The income of the trust fund under the administration of
(trustor) and is required to file its own tax return. A revocable
income of the trust fund a trust company is taxable to the trust fund itself and not the trust
trust is not a separate taxable person. The income of a revocable
158 Chapter II Banks 159
trust is taxable to the owner of the fund, to be lumped together
with all other income subject to tax.
GOVERNMENT BANKS
Whatever tax regime is applicable to private banks
applies to government banks as well. While the phase-out of
the tax privileges of the governmentbanking entities—i.e., LBP;
DBP, PNB and Al-Amanah (see discussion below)—may have
financial repercussions on their operations, the removal of their
exemptions puts them at par with their counterpart private
banking entities. This development is, therefore, desirable from
the point of view of tax equity. That is, those that are similarly
situated should have the same tax burden, and all banking
institutions are placed on a level playing field, thus avoiding
unfair competition from government banking institutions.
Land Bank of the Philippines
LBP subject to The LBP is a universal bank that was created to serve
regular taxes the financial requirements of the government's agrarian reform
program (RA 3844, otherwise known as the Code of Agrarian
Reforms of the Philippines, August 8, 1963). Pursuant to the
said law, the LBP was granted certain tax exemption privileges
to enable it to operate viably as a conduit for agrarian reform
(Section 98, RA 3844). The tax exemption privileges of the LBP
were, however, withdrawn by PD 1931 in view of the
government's fiscal problems. The withdrawal was reiterated
by Executive Order (EO) No. 93 (December 17, 1986) also for
the same reason. Thus, it is subject to income tax, GRT, D8T
and withholding taxes similar to private banks.
For example, the LBP is subject to the provisions of the
CWT and DST on its dacion en pag o transactions with
borrowers (BIR Ruling No. DA-453-o3, December 5, 2003). It
was also clarified in a DOF-BLGF Opinion (October 5, 1998)
that the LBP is subject to real property taxes as of January 1,
1992 (effectivity of RA 716o).
Development Bank of the Philirmings
DBP subject to The Development Bank of the Philippines, (DBP) was
regular taxes first organized as the Rehabilitation Finance Corporation
(RFC), which was createdto provide credit for the rehabilitation
of the Philippine economy (RA 85, October 29, 1946). The RFC
was later converted to the DBP (RA 2081, June 14, 1958) to
support the country's industrial development efforts.
Just like the LBP, the DBP operates as a viable
commercial banking institution and assumes a prominent role
in financial intermediation.
The DBP was also granted certain tax privileges under
PD 1461 (June 11, 1978). Similar to the LBP, these were
withdrawn by PD 1931 and EO 93 due to the government's fiscal
problems. The DBP is therefore subject to the same taxes
imposed on banks and banking institutions. For example, the
DBP is subject to the provisions of the CWT on its sale of real
property (BIR Ruling No. 099-99, July 9, 1999). Likewise, it is
subject to DST, under Section 179 of the Tax Code, on its loan
transactions.
160 Chapter II
CHAPTER
Philippine National Bank
PNB subject to The Philippine National Bank (PNB) was created as a
regular taxes regular commercial bank (Public Act No. 2612, February 4,
1916, as repealed by RA 1300, June 16, 1955 and PD 312,
October 18, 1973, PD 694, May 8, 1975, among others). The
PNB was granted tax privileges under PD 694 but, as in the
case of the LBP and the DBP, these privileges were also
withdrawn by PD 1931 and E0 93 in view of the government's
pressing fiscal problems.
Al-Amanah Islamic Investment
Bank of the Philippines
The Al-Amanah Islamic Investment Bank of the
Philippines was established to promote and accelerate the
socio-economic development of the Autonomous Region of
Muslim Mindanao by performing banking, financing and
investment operations in the areas of agricultural, commercial
and industrial ventures based on the Islamic concept of banking
(RA 6848, January 26, 1990).
To ensure its growth and capability to service the
financial needs of the region, the Al-Amanah Islamic Bank was
granted certain tax privileges (Section 37, RA 6848). These tax
privileges lapsed, however, as there was a sunset clause (one to
eight years) in the availment of such privileges. There are
proposals to revive these tax privileges to enable the bank to
resolve its financial problems and operate more viably.
161
III Insurance
DEFINITION AND CLASSIFICATION
Just like the banking sector, the insurance sector is
made up of different types of insurance companies, each
catering to a specific market or need. However, compared to
banks, which account for about 7o% of the gross value added
(GVA) of the entire financial sector, the insurance sector
contributes only around 21% (BusinessWorld, 2004).
Nevertheless, the significant contribution of the insurance
sector to the growth and development of the capital market in
the Philippines cannot be ignored. As in the case of banks,
insurance companies are responsible for generating substantial
funds that can be accessed by various sectors of the country for
growth and development.
The Insurance Commission (IC)—which is the
government agency tasked to supervise and regulate the
insurance industry in the country pursuant to the provisions
of the Insurance Code of the Philippines [Presidential Decree
(PD) No. 146o, June 11,1978]—registered and authorized a total
of 137 insurance companies as shown in Table 3.1.
162 Chapter III Insurance 163

Table 3.1 Insurance companies are classified mainly into the

Number of Insurance Companies following categories:
'Authorized to Transact Business in the Philippines
(CY 2004) 1. A life insurance company is engaged in the
business of life insurance or insurance on
human lives and insurance appertaining
Category Domestic Foreign Total
thereto or connectedtherewith (Section re, PD
1460).
Life 24 10 34
Non-life 87 10 97
Composite (life and non- 1 4
For tax purposes, health and accident insurance
3
life) taken on a person is classified as life insurance.
Professional reinsurers 2 0 2
2. Anon-life-insurance company, as distinguished
Total 116 21 137 from a life insurance company, is engaged in
Source: Insurance Commission the business of insurance on subjects other than
human lives. Non-life insurance companies
include, but are not limited to, the following:
insurer or insurance In general, the terrnnsurance company"
company includes the following: (a uals, partnerships, a. Marine insurance companies provide
associations or corporations, lu ing government-owned or insurance against loss of, or damage to,
-controlled corporations (GOCCs) or entities, engaged as vessels, craft, aircraft, vehicles, goods,
principals in the insurance business, except mutual benefit freights, cargoes, or merchandise with
associations; (b) professional reinsurers, that is, any person, respect to risks or perils arising from
partnership, association or corporation that transacts solely and navigation, transit or transportation or
exclusively in the reinsurance business in the Philippines; and while being assembled, packed, crated or
(c) corporations formed or organized to save any person/s or baled for, or awaiting, shipment; person or
other corporations from loss, damage or liability arising from property in connection with marine transit
any unknown, future or contingent event, or to indemnify or or transportation insurance; precious
compensate any person/s or corporation/s for any such loss, stones or jewelry in the course of
damage or liability, or to guarantee the performance of, or transportation or otherwise; and bridges,
compliance with, contractual obligations or the payment of tunnels and other instrumentalities of
debts of others (Sections 184 and 185, PD 1460). transportation and communication
(Section 99, PD 1460).
Although the Tax Code does not explicitlyedefine an
insurance company, Revenue Regulations (RR) No. 09-04 b. Fire insurance companies provide
(June 21, 2004) defines the term "insurance" very broadly to insurance against loss by fire, lightning,
refer to entities that undertake, for a fee, to indemnify another windstorm, tornado, or earthquake and
(insured) against loss, damage or liability arising from an other allied risks, when such risks are
unknown or contingent event.
1 1
164 Chapter III
covered by extension to fire insurance
policies or under separate policies (Section
167, PD 1460).
c. Casualty insurance companies provide
insurance covering loss or liability arising
from accident or mishap, excluding certain
types of losses that are, by law or custom,
considered falling exclusively within the
scope of other types of insurance, such as
fire or marine. Casualty insurance includes,
but is not limited to, employer's liability
insurance, workmen's compensation
insurance, public liability insurance, motor
vehicle liability insurance, plate glass
insurance, burglary and theft insurance,
personal accident and health insurance as
written by non-life insurance companies,
and other substantially similar kinds of
insurance (Section 174, PD 1460).
d. Surety companies guarantee the
performance by another party (called the
principal or obligor) of an obligation or
undertaking in favor of a third party (called
the obligee). The business of surety
includes official recognizance, stipulations,
bonds or undertakings. A surety contract
is deemed to be an insurance contract only
when the surety is engaged in business as
such and not merely an isolated transaction.
Thus, a corporation organized for the
purpose of guaranteeing performance of
contractual obligations or the payment of
debts is deemed to be an insurance
corporation and is subject to the provisions
of the Insurance Code of the Philippines
(Section 175, PD 146o).
Insurance 165
3. A reinsurance company provides reinsurance.
A contract of reinsurance is one by which an
insurer procures a third person to insure him/
her against loss or liability by reason of an
original insurance. In other words, under
reinsurance, the insurer becomes the insured
(Section 95, PD 1460).
4. A mutual insurance company is any insurance
company whose policyholders constitute
themselves as both insurer and insured.
However, under the Insurance Code of the
Philippines (Sections 262 to 272, PD 1460), the
conversion into a mutual insurance company
applies only to a domestic stock life insurance
company.
The Tax Code, on the other hand, has provisions
dealing with mutual fire insurance companies,
mutual employers' liability and mutual
workmen's compensation insurance
companies, mutual casualty insurance
companies, and mutual marine insurance
companies (Section 37, Tax Code).
5. A crop insurance company provides insurance
against crop loss. The only corporation engaged
in this business is the government-owned
Philippine Crop Insurance Corporation (PCIC).
As to nationality, insurance companies are either
domestic or foreign. A domestic insurance company is
organized under Philippine laws and is authorized to conduct
insurance business in the Philippines. A foreign insurance
company, on the other hand, is organized under the laws of a
foreign country and is authorized to conduct insurance business
in the Philippines.
166 Chapter III
Insurance companies may either be privately-owned or
government-owned, e.g., the Government Service Insurance
System (GSIS) and the Social Security System (SSS).
In addition .to the traditional insurance companies
enumerated above, other types of companies have emerged that
do business similar to insurance business. These are:
1. Pre-need companies - A pre-need company is
any corporation registered with the Securities
and Exchange Commission (SEC) and
authorized or licensed to sell or offer for sale
pre-need plans.
Pre-need plans are contracts that provide for
the performance of future services or the
payment of future monetary considerations at
the time of actual need, for which the
planholder pays, in cash or installment, at
stated prices, with or without interest or
insurance coverage, and includes life, pension,
education, interment and other plans that the
SEC may approve from time to time (Section
3.9, RA 8799, June 19, 2000, otherwise known
as the Securities Regulation Code).
2. Health maintenance organizations (HMOs) —
An HMO refers to a company generally set up
to establish, maintain, conduct and operate a
prepaid group practice health care delivery
system or take care of diseased and disabled
persons enrolled in a health care plan.
Under the concept of a prepaid group practice
health care delivery system, individuals
enrolled in the HMO's health care program are
entitled to medical services conducted by duly
licensed physicians, specialists and other
Insurance ta7
professional technical staff in a hospital or clinic
that is owned, operated or accredited by the
HMO. To be entitled to the services, the
individual must enroll in the HMO's heath care
program and pay an annual fee (Philippine
Health Care Providers, Inc. u. The
Commissioner of Internal Revenue, 2002).
INCOME TAXATION
Regular Income Tax
In general, insurance companies, whether life or non-
life, are subject to income tax similar to other business entities.
The tax rate is 35% and is based on net income, that is, gross
income (income from within and outside the Philippines for
domestic insurance companies and income from within the
Philippines for resident foreign insurance companies) less
allowable items of expenses or deductions (Section 34, Tax
Code).
Income derived from passive investments, such as
interest income, dividends and royalties, is also subject to tax
in the same manner as when these are received by other entities.
That is, these are subject to final withholding taxes at varying
rates depending on the income recipient and the nature of the
income. (See discussion on withholding tax in Chapter II,
Banks.)
Insurance companies derive their income mainly from
the following sources: (i) premium income, or the agreed price
or consideration paid by the insured to the insurer who
168 Chap ter III
undertakes to indemnify the former against a specified peril
(Section 77, PD 146o); (2) commissions earned on insurance
contracts referred to reinsurance companies; (3) other
underwriting income; (4) income from investment; and (6)
released reserves.
Special deductions in general
RESERVES In recognition of the peculiarities of the nature of the
business of insurance, special items of deduction are allowed
to insurance companies, whether domestic or foreign, under
net additions to reserve Section 37 of the Tax Code. For example, net additions required
funds are deductible by law to be made within the year to reserve funds and the sums,
other than dividends paid within the year, on policy and annuity
contracts are allowed as deductions from gross income.
Insurance companies other than life insurance
companies are required to maintain a reserve for unearned
premiums on their policies in force, which shall be charged as
inability in the determination of their financial condition. This
reserve shall be equal to 4o% of the gross premium, less returns
and cancellations, received on policies or risks having not more
than a year to run. For marine cargo risks, the reserve is 4o%
of the premiums written in the policies upon yearly risks and
the full amount of the premiums written during the last two
months of the calendar year upon all other marine risks not
terminated (Section 213, PD 146o).
released reserves The net addition to reserve funds can be claimed as
are taxable deduction only in the year in which the addition is actually made
and not in the year a reserve is provided. Correspondingly,
released reserves are taxable as income in the year of actual
release [Section 37(A), Tax Code].
Insurance 169
Note that amounts representing dividends paid on
policy and annuity contracts are not allowed as deduction from
taxable income.
Special deductions for mutual insurance
In the case of mutual insurance companies, certain
special deductions are also allowed.
premium deposit For non-life insurance companies such as fire,
retained is taxable employees' liability, workmen's compensation and casualty
insurance companies that require their members to make
premium deposits to provide for losses and expenses, any
portion of the premium deposits returned to their policyholders
shall not form part of taxable income. However,'all income
received from all other sources, plus such portion of the
premium deposits as are retained by them for purposes other
than the payment of losses and expenses and reinsurance
reserves, is a taxable income.
For mutual marine insurance companies, the amounts
paid for reinsurance and amounts repaid to policyholders on
account of premiums previously paid by them, including the
interest paid upon amounts between the ascertainment and
payment thereof, are allowed as deduction. However, gross
premiums collected and received shall be included as part of
gross income.
In the case of assessment insurance companies, the
actual deposit of sums with the officers of the government,
which serves as additions to a guarantee or reserve fund, are
deductible from taxable income.
170 Chapter III
Minimum Corporate Income Tax
MCIT is 2% Insurance companies, like any other corporate
of gross income businesses, are subject to a minimum corporate income tax
(MCIT) at a rate of 2% of gross income [Section 27(E), Tax Code
for domestic insurance companies and Section 28(A)(2) for
resident foreign insurance companies]. The discussion on the
nature of MCIT, in general, is found in Chapter I, General Rules,
and Chapter II, Banks, and -the same applies to insurance
companies as well.
gross receipts The MCIT is based on gross income, which is defined
as gross receipts less sales returns, allowances, discounts and
cost of services. For purposes of computation of the MCIT
liability of insurance companies, the gross receipts include all
items of income actually and constructively received, including
the following [Revenue Memorandum Circular (RMC) 04-03,
December 31, 2002]:
1. Net retained premiums (gross premiums net of
returns, cancellations, and premiums ceded)
Membership fees in the case of HMOs
3. Miscellaneous income
4. Investment income not subject to final tax
5. Released reserves and, in the case of pre-need
companies, gross withdrawals from the trust
funds set up independently as mandated by the
SEC
6. All other items treated as gross income under
Section 32 of the Tax Code
cost of services On the other hand, the "cost of services" that can be
deducted includes all direct costs and expenses necessarily
incurred to provide the services required by customers and
clients, including: (a) salaries and employee benefits of
personnel, consultants and specialists directly rendering the
service, (b) cost of facilities directly utilized in providing the
Insurance 171 1
service, such as depreciation or rental of equipment used, and
(c) the cost of supplies [Section 27(E)(4), Tax Code].
With respect to items of income already subjected to
final taxes, the income is not included as part of gross receipts.
Correspondingly, any expense related to the generation of this
income shall not be allowed as an item of deduction.
The MCIT provision under the Tax Code is
implemented by RMC which specifically defined the
gross receipts and the allowable items of deduction constituting
gross income (for MCIT purposes) for each of the industries
affected.
In the case of insurance companies, the term "grew
receipts" is defined very broadly to cover all items of income.
The deductions, on the other hand, are defined very strictly so
as to allow only those that are incurred directly and exclusively
in the insurance and pre-need business, including the
generation of investment income not subject to final taxes, but
limited only to the following: (a) salaries, wages and other
employee benefits of personnel directly engaged in said
activities, (b) commissions on direct writings/agents of pre-
need companies, (c) claims, losses, maturities and benefits net
of reinsurance recoveries, and (d) net additions required by
law to reserve fund for insurance companies, and in the case of
pre-need companies, contributions to the trust funds to he set
up independently as mandated by the SEC.
RMC 04 - 03 stricter than Clearly, the determination of gross income for MCIT
Tax Code provision of under RMC 04-03 is stricter in terms of the items allowed as
MCIT deductions compared to that provided under the law. For
example, depreciation, rental of equipment, consultancy fees,
actuarial fees, specialist services and cost of supplies are allowed
as deduction under the Tax Code but not under RMC
Considering, therefore, that the implementing rules (RMC 04-
03) directly contradict the provisions of the Tax Code, the
validity of RMC 04-03 may be questioned as an excessive
172 Chapter III
exercise of regulatory powers tantamount to legislation. (See
related discussion in Chapter II, Banks.)
MCIT rules on In the determination of gross income for MCIT, the
insurance apply to same rules apply to all insurance companies including life or
pre-need companies non-life insurance companies, pension funding companies, pre-
and HMOs need companies and HMOs. Note that for purposes of MCIT,
pre-need companies and HMOs are taxed in the same manner
as insurance companies. This is the first Bureau of Internal
Revenue (BIR) issuance recognizing pre-need and HMOs as
insurance companies.
Taxation of Certain Transactions
Related to Insurance Business
Life insurance proceeds and returns of premiums
The proceeds of life insurance policies paid to the heirs
or beneficiaries upon the death of the insured, whether in a
single sum or otherwise, are excluded from gross income.
However, if such amounts are held by the insurer under an
agreement to pay interest, the interest payments shall be
included in gross income [Section 32(B)(1), Tax Code].
Likewise, any amount received by the insured as a
return of premium paid by him under a life insurance,
endowment, or annuity contract, either during the term or at
the maturity of the term mentioned in the contract, or upon
surrender of the contract, is excluded from gross income
[Section 32(B)(2), Tax Code].
The above exclusions apply only to life insurance and
not to non-life insurance. This is in recognition of the fact that
life insurance is a savings product It is similar to a bank deposit
Insurance 173
or placement. The premium paid for life insurance represents,
to a large extent, the savings component thereof. Thus, similar
to a bank deposit, which is not taxed when withdrawn, any
insurance premium that is returned and any life insurance
proceeds paid upon the death of the insured to the beneficiaries
are excluded from gross income and, consequently, not subject
to income tax, these being a mere return of capital.
Proceeds of life insurance received by the estate
Any amount received as proceeds from life insurance
by the estate or by the executor or administrator on policies
taken out by the insured. upon his own life shall be included in
the gross estate of the insured, subject to estate tax. The amount
subject to estate tax shall be the amount received, irrespective
of whether or not the insured retained the power of revocation,
or to the extent of the amount receivable by the beneficiary
designated in the policy of insurance. In case the designation
of the beneficiary in the contract is irrevocable, the proceeds
shall not be included in the gross estate [Section 85(E), Tax
Code].
If the designation of the beneficiary in an insurance
policy taken out by an insured upon his own life is irrevocable,
the proceeds are not subject to tax, either as part of gross estate
of the decedent or as income of the beneficiary. (See also
succeeding discussions on the use of insurance products for
estate tax planning.)
Compensation for injuries or sickness under a health
and accident insurance
Any amount received through accident or health
insurance as compensation for. personal injuries or sickness is
174 Chapter III Insurance 175
excluded from gross income and, therefore, exempt from For this exemption to apply, however, the plan must
income tax [Section 32(B)(4), Tax Code]. a coniply with the following:
Tax exemptions of trusteed retirement plans
A trusteed employees' retirement or pension plan is
entitled to several tax advantages under the Tax Code, as
follows:
actual contributions to First, an employer establishing a pension trust to
trust fund allowed as provide for the payment of reasonable pension of his employees
deductions is entitled to claim a deduction from gross income, the amount
of which is equal to the actual contributions to the trust made
during the taxable year to cover for the pension liability accruing
during the year. An employer can also claim as a deduction an
amount equal to one-tenth of the contributions made for past
service cost, beginning with the year in which the contribution
is made until fully amortized [Section 34(J), Tax Code].
Second, the income of the employees' trust from its
investments is exempt from income tax pursuant to Section
6o(B) of the Tax Code. Thus, interest income, dividends, and
gains from sale or shares of stocks received by an employees'
retirement pension plan are exempt from income tax.
income of qualified In one case, the BIR held that where a bank, in its
employees'trust capacity as investment manager of a qualified reasonable
exempt from income tax retirement benefit plan, purchased a real property and
subsequently sold the same, the sale is exempt from capital
gains tax (CGT) and consequently from withholding tax. The
sale is, however, subject to documentary stamp tax (DST)
imposed on sales of real property, since DST is not an income
tax (BIR Ruling No. DA-490-04, September 14, 2004) but a
tax on the document or transaction, and is therefore not covered
by the exemption.
1. The contributions are put in trust for the
purpose of distributing to the employees the
earnings and principal of the fund accumulated
by the trust in accordance with the terms
contained in the plan.
2. Under the trust, it is impossible at any time
prior to the satisfaction of all liabilities, with
respect to employees under the trust, for any
part of the corpus or income to be used for, or
diverted to, purposes other than the exclusive
benefit of the employees.
Third, retirement benefits received by an employee
under a reasonable private retirement plan approved by the
BIR are exempt from income tax provided the employee has
been in the service of the employer for a period of ten years
retirement benefits and is not less than 5o years of age at the time of the retirement
exempt from income tax [Section 32(B)(6)(a), Tax Code].
trusteed plan These tax benefits are available only to trusteed
employees' retirement or pension plans. "Trusteed" means the
fund or plan is put in a trust account and is managed by trustees,
making it impossible for the employer or the employees to use
the corpus or the income of the fund for purposes other than
the payment of benefits of the employees. The existence of a
trust and the creation of a trust relationship must be clear from
the agreement.
trust relationship not In this regard, the BIR held that with respect to
implied in insurance insurance contracts, a trust relationship between the insured
and the insurance company cannot be implied. In the same
way, an authority to perform trust functions cannot be implied
from an authority to issue insurance contracts (BIR Ruling No.
092-86, June 24, 1986).
176 Chapter III
non-trusteed plan Thus, an insured retirement plan maintained by an
(DAC and GDAC) employer under a Deposit Administration Contract (DAC) or a
Group Deferred Annuity Contract (GDAC), executed by and
between the employer as insured or the policyholder and an
insurance company as the insurer, is a non-trusteed plan [BIR
Ruling Nos. 095-85 (June 24, 1985); 092-86 (June 24, 1986);
and 116-90 (June 8, 199o)]. The DAC and the GDAC cannot
be considered an agreement constituting a trust relationship
because the insurance company or the insurer under the DAC
and GDAC assumes the risks or responsibility in case of loss of
the fund.
Under a DAC and GDAC arrangement, the insurance
company guarantees a face amount or a certain amount of
income to the insured. This is in contrast to the basic feature
of a trusteed plan. In a trusteed plan, the trustee does not make
any guarantee or stipulation as the trustee is required to account
for all the income earned and later turn over to the trustor or
beneficiaries all the income of the fund net only of trustees'
fees.
As such, a retirement or pension plan under the DAC
or GDAC is not entitled to the benefits given to trusteed
retirement plans as enumerated above. The employer-insured
is not entitled to deduct the past service costs contributed to
the plan from its gross taxable income. It can only deduct the
amount of premium actually withdrawn from the DAC or
GDAC, which is used to pay for the benefit of its employees.
Likewise, the income of the plan from investment is not exempt
from income tax. However, the retirement benefits received
by employees from such insured plans are still exempt from
income tax.
In one case, an employees' retirement plan through a
pre-need company was given the tax privileges of a trusteed
retirement plan but with a condition that the pre-need company
will deposit the contributions into a trust account specifically
set up for the establishment of that employees' retirement plan.
Insurance 177
In this case, the pre-need company only manages the trust fund
(BIR Ruling No. DA-388-o4, July 20, 2 004).
Premium paid for group life or health insurance
The cost of life or health insurance premiums and other
non-life insurance premiums borne by the employer for his
employees is a taxable fringe benefit subject to the fringe benefit
premium for group tax (FBT) to be paid by the employer. However, the cost of
life or health insurance premiums borne by the employer for group life or health
not subject to FBT insurance of its employees is not considered a taxable fringe
benefit, hence exempt from FBT [Section 2.33(B)(10) RR 03-
98, May 21, 1998].
Tax advantages of certain insurance products
Some insurance products offer opportunities to save
on taxes, especially on estate and transfer taxes and on FBT, to
name a few.
1. Estate tax and transfer taxes
life insurance structured Life insurance, if structured properly, can be
properly avoids transfer used to transfer a property or money to another
taxes person without being subjected to any of the
transfer taxes, i.e., the CGT, the donor's tax or
the estate tax.
In general, a property transferred to another
person is subject either to a CGT in the case of
sales or exchanges of property, a donor's tax for
donation of property (money is a property)
during the lifetime of the donor, or to an estate
tax if transfer is made mortis causa.
178 Chapter III
The proceeds of a life insurance policy, where
the beneficiary designated is irrevocable, do not
form part of the estate of the decedent-insured
and are therefore not subject to estate tax. At
the same time, the proceeds are not taxable
income to the beneficiary. Effectively,
therefore, a decedent, through life insurance,
is able to transfer his properties to his heirs or
beneficiaries without being taxed, both on the
side of the transferor-decedent and the
recipient-beneficiary.
2. Fringe benefit tax
Group life or health insurance offers
opportunities to save on FBT on benefits given
to employees. Considering that premiums paid
for group life or health insurance are exempt
from FBT, an employer can use insurance to
provide for the benefits of its employees without
being subjected to FBT.
For example, if a company obtains group health
insurance to cover for the medical expenses of
its employees, the premium paid is deductible
from its taxable income and, at the same time,
is not subject to FBT. Under existing
regulations, medical benefits of employees in
excess of Pi o, 000 that are paid by the employer
are subject to FBT. Using a group health
insurance, a company can give medical benefits
free from FBT even for amounts exceeding the
P10,000 threshold.
The premium paid for group life or health
insurance, regardless of the amount and the
coverage of the benefit given to beneficiaries,
Insurance 179
is exempt from FBT and is a deductible business
expense of the employer.
BRANCH PROFIT REMITTANCE TAX
As in the case of foreign banks operating in the
Philippines through a branch, the branches of foreign insurance
companies operating business in the Philippines are subject to
a 15% branch profit remittance tax (BPRT) based on the total
profits applied or earmarked for remittance to its head office
without any deduction. (See also BPRT discussion in Chapter
II, Banks. The same applies to insurance companies.)
Interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages, premiums,
income not effectively annuities, emoluments, or other fixed or determinable annual
connected is not a periodic (FDAP) income or casual gains, profits or income, and
branch profit capital gains derived from all sources within the Philippines
shall not be treated as branch profits unless they are effeettliely
connected with the conduct of their trade or business in the
Philippines [Section 28(A)(5), Tax Code]. To be effeettvely
connected, the income need not be derived from the actual
operation of the corporation's trade or business in the
Philippines. It is sufficient that the income arises from the
business activity that the corporation is engaged in here in the
Philippines (RMC 55-8o, December 3, 198o).
178 Chapter III Insurance 179

The proceeds of a life insurance policy, where
the beneficiary designated is irrevocable, do not
form part of the estate of the decedent-insured
and are therefore not subject to estate tax. At
the same time, the proceeds are not taxable
income to the beneficiary. Effectively,
therefore, a decedent, through life insurance,
is able to transfer his properties to his heirs or
beneficiaries without being taxed, both on the
side of the transferor-decedent and the
recipient-beneficiary.
2. Fringe benefit tax
Group life or health insurance offers
opportunities to save on FBT on benefits given
to employees. Considering that premiums paid
for group life or health insurance are exempt
from FBT, an employer can use insurance to
provide for the benefits of its employees without
being subjected to FBT.
For example, if a company obtains group health
insurance to cover for the medical expenses of
its employees, the premium paid is deductible
from its taxable income and, at the same time,
is not subject to FBT. Under existing
regulations, medical benefits of employees in
excess of Pao, 000 that are paid by the employer
are subject to FBT. Using a group health
insurance, a company can give medical benefits
free from FBT even for amounts exceeding the
P10,000 threshold.
is exempt from FBT and is a deductible business
expense of the employer.
BRANCH PROFIT REMITTANCE TAX
As in the case of foreign banks operating in the
Philippines through a branch, the branches of foreign insurance
companies operating business in the Philippines are subject to
a 15% branch profit remittance tax (BPRT) based on the total
profits applied or earmarked for remittance to its head office
without any deduction. (See also BPRT discussio9 in Chapter
II, Banks. The same applies to insurance companies.)
Interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages, premiums,
income not effectively annuities, emoluments, or other fixed or determinable annual
connected is not a periodic (FDAP) income or casual gains, profits or income, and
branch profit capital gains derived from all sources within the Philippines
shall not be treated as branch profits unless they are effectively
connected with the conduct of their trade or business in the
Philippines [Section 28(A)(5), Tax Code]. To be effectively
connected, the income need not be derived from the actual
operation of the corporation's trade or business in the
Philippines. It is sufficient that the income arises from the
business activity that the corporation is engaged in here in the
Philippines (RMC 55-8o, December 3, 198o).

The premium paid for group life or health

insurance, regardless of the amount and the
coverage of the benefit given to beneficiaries,
180 Chapter III
IMPROPERLY ACCUMULATED
EARNINGS TAX
insurance companies Similar to banks, insurance companies (as defined
are exempt from IAET under the Insurance Code of the Philippines), whether life or
non-life, are exempt from improperly accumulated earnings
tax (IAET) [Section 29(B)(2)(c),Tax Code]. (See also discussion
on IAET in Chapter II, Banks. The same applies to insurance
companies.)
Pre-need companies and HMOs may not be covered by
the exemption given to insurance companies considering that
they are not under the supervision of the IC and are not
insurance companies within the contemplation of the definition
of insurance companies under the Insurance Code of the
Philippines. Thus, they are subject to IAET, unless they are
publicly listed.
WITHHOLDING TAXES
For purposes of this chapter, only the withholding taxes
that are peculiar to the insurance industry are discussed.
Withholding Tax Obligations
Like any other taxpayer, insurance companies are
withholding agents of the government with respect to taxes
Insurance 181
required to be withheld from its income payments to suppliers.
The tax required to be withheld may either be a final tax (Fr),
a creditable withholding tax (CWT) or a withholding tax oh
compensation (WTC).
The following income payments are subject to
withholding tax:
1. Professional fees paid to insurance agents are
subject to a 15% withholding tax if their gross
income for the current year exceeds P720,000,
and 10% if otherwise [Section 2.57.2(A)(4), RR
02-98, as amended].
2. Commissions or fees paid to insurance brokers
are subject to a 10% withholding rax [Section
2.57.2(G), RR 02-98, as amended].
(Note that the withholding tax rate imposed on
commissions or fees of insurance agents differs
from that imposed on insurance brokers. In the
case of agents, it is 10% to 15% depending on
the income of the agent. For brokers, it is a
straight io% regardless of the income of the
broker.)
3. Rental of real or personal property is subject to
a 5% CWT [Section 2.57.2(C), RR 02-98, as
amended].
4. Interest paid to a nonresident foreign company
for loans obtained is subject to 35% final tax or
the applicable tax treaty rate. In the case of
interest on the reinsurance retained by the local
insurance company, it shall be deemed as
interest paid on foreign loans subject to a 20%
FWT or the applicable tax treaty rate (BIR
Ruling No. 115-95, July 24, 1995).
182 Chapter III
5. If the insurance company is among the top ten
thousand corporations (TTCs) designated by
the BIR, its payments for the purchases of goods
and services are subject to a a.% or 2%
withholding tax, respectively [Section
2.57.2(M), RR 02-98, as amended].
6. A 12% value-added tax (VAT) is also required
to be withheld on non-life reinsurance
premiums paid to a nonresident foreign
corporation. See discussion below.
Reverse withholding for brokers' and agents'
commissions
As required under RR 02-98, as amended, any amount
paid as commission or fee to insurance brokers and agents is
subject to a withholding tax at the rate specified in (i.) and (2)
above, which shall be withheld by the insurance company and
remitted to the BIR.
This requirement subjecting the commissions and fees
of brokers and agents to a withholding tax is easier said than
done. This is because the insurance company, which is required
to withhold the tax, does not have any control over the payment
of the income. In the collection of taxes by way of withholding,
control over the payment of the income is necessary to effect
withholding. Thus, it has been a rule under existing withholding
regulations. that, as one of the requirements, the payor must
have control over the income payment.
direct netting As a normal business practice in the insurance industry,
arrangement premium payments are collected by the brokers and agents for,
and in behalf of, insurance companies. These are then remitted
to the insurance companies net of their fees and commissions.
In this scenario, the commissions are settled or paid through
Insurance 183
direct netting from the premiums, which are in the hands of
the 'brokers/agents, without passing through the insurance
companies. Being so, it would be difficult to comply with the
withholding requirements of the BIR.
An arrangement that may be considered in order to
comply with the required withholding is the "reverse
withholding" scheme. Under this scheme, the 10% (or 15% if
agent's fee exceeds P720,000 in a year) representing the tax to
be withheld on such commissions shall be paid back to the
insurance company to be remitted to the BIR.
As an illustration: Under normal circumstance, if an
insurance broker receives the amount of Pioo as premium from
the insured and its commission is P20, the amount to be
remitted to the insurance company is P80. Under a reverse
withholding scheme, the amount representing the tax required
to be withheld is given to the insurance company so that the
insurance company can remit the same to the BIR. In this
example, the amount to be remitted to the insurance company
by the broker/agent is P82 (P8o as net premium plus P2,
representing the 10% withholding tax on the commission of
P2o). The insurance company remits the P2 to the BIR using
BIR Form 16oi.-E and then issues a Certificate of Withholding
(BIR Form 2307) to the broker/agent in the amount of P2,
which the broker/agent can use as tax credit from the, payment
of its income tax liability at the end of the taxable year in which
the income is received.
Withholding of VAT on premiums received or
reinsurance premium ceded
See discussion on VAT on non-life insurance companies
in this chapter.
184 Chapter III
Income of Insurance Companies
Subject to Withholding Tax
As some income payments by insurance companies are
subj ect to withholdingtaxes, so are incomes receivedfrom their
customers..Similar to other business entities, income received
by insurance companies from passive investments, such as
interests, dividends, royalties and capital gains, is subject to
final taxes.
It is to be noted, however, that interest income received
from loans to policyholders, or from any other source not arising
from currency bank deposits and deposit substitutes, is subject
to the regular income tax of 35% based on net, and not to an
FWT. (See also discussion on withholding tax in Chapter II,
Banks. The same applies to insurance companies.)
Premiums received if payor is a TTC
Again, similar to the interest income received by banks,
premium income received by insurance companies is also
subject to a 2% CWT if paid by a TTC.
RR 17-03 (March 31, 2003) expanded the withholding
tax liabilities of TTCs to cover all purchases of services at the
rate of 2%. (Prior to this, only purchases of goods by TTCs
were subjected to the 1% withholding tax.) Insurance
companies, being suppliers of insurance services, are subject
to the 2% withholding tax on premium income received by them
from TTCs. The 2% withholding tax applies to premiums
received from both life and non-life insurance.
If the premiums are paid to insurance agents/brokers,
the 2% tax shall be withheld by the TTC and deducted from the
Insurance 185
total premium. However, the Certificate of Withholding (HIR
Form 2307) shall be in the name of the insurance company
and not the insurance agent/broker. Correspondingly, the
official receipts (OR) to be issued by the insurance agent/broker
evidencing receipt of premium shall be that of the instimuce
company and not its own receipt. Otherwise, the premium is
taxable to the agent/broker as its own income. When the
premiums are remitted to the insurance companies by the
brokers/agents, the same shall not again be subjected to the
2% withholding tax.
BUSINESS TAXES
The business taxation of insurance companies varies
between life and non-life insurance. Premiums received or
collected from life insurance, including health and accident
insurance, are subject to a 5% premium tax, while premiums
from non-life insurance are subject to a 12% VAT.
The differentiation made by the law in the business
taxation of insurance companies is premised on the fact that,
while both are engaged in providing insurance services, the
1
intrinsic nature of their businesses differs.
Non-life insurance is a pure insurance. A premium is
paid to insure a risk that may or may not happen. The insured
gets recovery of losses if the risk insured against happens;
otherwise, premium paid is lost. For tax purposes, the business
of non-life insurance is a sale of service subject to VAT.
On the other hand, life insurance business is more skin
to a deposit or a savings product rather than an insurance.
Premiums paid for life insurance are certain to be received back
186 Chapter III
or withdrawn at some future time, either upon death or during
the lifetime of the insured. Thus, life insurance companies are
treated differently from non-life insurance companies and are
subject to the 5% premium tax.
Premium Tax on
Life Insurance Companies
Background
The taxation of life insurance premiums has undergone
a series of changes in the past. When this tax was first
introduced, the rates were based on the number of years of
operation of the insurance company. The basis of the rates
was shifted to the type of the insurance company, that is,
whether the insurance company is domestic or foreign. A
further amendment transformed the taxable base to total
premiums collected without distinction as to the type of
insurance company. This base was eventually changed to gross
premiums [Commonwealth Act Nos. 466 (June 15, 1939) and
523 (May 10,1940); RA 39 (October 1, 1946), 716 (June 6, 1952),
1504 (June 16, 1956), 6110 (August 4, 1969); PD 739 (July 1,
1975), 1959 (October 10, 1984) and 1994 (November 5, 1985);
and RA 7716 (May 5, 1994) and 8424 (December 11, 1997)1
The rates of the premium tax also underwent several
changes, from a dual or multi-tiered structure to the present
single tax structure of 5%.
Insurance 187
The premium tax
The business tax imposed on the business of life
insurance is the 5% premium tax. The tax is collected from
every person, company or corporation (except purely
cooperative companies or associations) doing life insurance
business of any sort in the Philippines based on total premium
collected, whether such premiums are paid in money, notes,
credits or any substitute for money (Section 123, Tax Code).
health, disability and For purposes of the 5% premium tax, insurance on
accident insurance health, disability, and accident and all insurance pertaining to
are life insurance or connected with human lives are considered life insurance
subject to the 5% premium tax [Section 4.108-3(i), RR 16-05,
September 1, 2005]. (This classification is not in accord with
the provisions of the Insurance Code, which classify accident
and health insurance policies as non-life insurance policies
under Section 174 of PD 146o.)
EXCLUSIONS FROM Section 123 of the Tax Code provides for the exclusion
PREMIUM TAX of the following premiums received or collected in the
computation of the 5% premium tax:
1. Premiums refunded within six months after
payment on account of rejection of risk, or
returned for other reasons to the insured
The premiuni must be actually refunded within
six months from the date of payment. The six-
month period is counted from the date of
receipt of the premium to the date of the actual
refund. In cases where the refund is approved
within six months but is actually refunded to
the insured beyond the six-month period, the
premium may not be exempted from the
premium tax.

188 Chapter III
Premiums on reinsurance by a company that
2. to insure the lives of those named in the variable
has already paid the tax
A contract of reinsurance is an arrangement
between the insurer with another insurer to
protect the first insurer from a risk already
assumed (Section 95, PD 146o).
The non-inclusion of reinsurance premium
upon which a tax has already been paid in the
determination of taxable receipts is meant to
avoid double taxation, which consequently
increases the cost of life insurance and imposes
undue burden on buyers. In claiming the
exemption, however, a proof that the 5%
premium tax was paid by the direct insurer on
the premium ceded is necessary.
3. Premiums collected or received by any branch
of a domestic corporation, firm or association
doing business outside the Philippines on
account of any life insurance of the insured who
is a nonresident, if any tax on such premium is
imposed by the foreign country where the
branch is established
4. Premiums collected or received on account of
any reinsurance, if the insured, in case of
personal insurance, resides outside the
Philippines, and if any tax on such premiums
is imposed by the foreign country where the
original insurance has been issued or perfected
5. On portion of the premiums collected or
received by the insurance companies on
variable contracts (pursuant to PD 612,
otherwise known as the Insurance Code of the
Philippines) in excess of the amounts necessary
I
Insurance 189
if
contract
Taxation of variable contracts
variable contract Section 232(2) of the Insurance Code defines the terra
defined "variable contract" as "any policy or contract, on either a group
or on an individual basis, issued by an insurance company
providing for benefits or other contractual payments or values
thereunder to van,' so as to reflect investment results of any
segregated portfolio of investments, or of a designated separate
account in which amounts received in connection with such
contracts shall have been placed and accounted for separately
from other investments and accounts." This contract may also
provide benefits or values incidental thereto payable in fixed
variable contracts not or variable amounts, or both. It shall not be deemed a "security"
considered securities or "securities" as defined in the Securities Act, as amended, or
in the Investment Company Act, as amended, nor subject to
regulation under said Acts.
A variable life insurance is basically similar to a regular
life insurance contract in that it requires the payment of
premiums with generally minimum guaranteed death beset.
Unlike a regular life insurance policy, however, a variable bfe
contract permits the allocation of a portion of the premium
payment to one or more investment options after deduction
for some charges. The death benefit and cash value of a variable
life policy increase and decrease based on the performance of
the investment. The death benefit, however, will not drop below
the initial guaranteed amounts, except if policy premiums are
not paid or if loans or other withdrawals are taken from the
policy.
Although the business of selling variable contracts is
considered new in the market, its popularity may be seen in
the number of licenses issued. In terms of number, those selling
variable contracts rank second to ordinary agents.
 Chapter III Insurance 191
190

The insurance company may invest and re-invest all or

part of the assets allocated to the separate variable accounts in
Table 3.2 any authorized securities and investments. However, while
Number of Licenses separate variable accounts are established, in the absence of a
Issued to Insurance Intermediaries trust relationship between the insurance company and the
(CY 2004) contract owners or beneficiaries, the income derived from such
investment rightfully belongs to the insurance company.

Group Number

Ordinary agents 40,762 TAXATION OF As mentioned earlier, there is no implied trust

Variable life agents 857 SEPARATE arrangement between the insurance company and the insured
General agents 619 VARIABLE or beneficiaries in an insurance contract. The same applies to
Non-life corn any underw riters 527 ACCOUNTS variable insurance contracts. The amounts put in separate
Insurance brokers 127 variable accounts belong to, or are owned by, the insurance
Resident agents 62 companies and not the beneficiaries or the contract-owners.
Adjusters 62 The requirement to establish separate accounts is Only for the
Actuaries 45 purpose of being able to value each account separately from
Reinsurance brokers 43 the other investments of the insurance company and not to
establish a trust fund for the beneficiaries.
Total 43,104
Thus, any income arising from the investment of the
funds in the variable accounts is, for purposes of taxation,
Every life insurance company that is authorized to issue, income of the insurance company that sold the variable
contracts and not income of the beneficiaries. As such, there
deliver, sell or use variable contracts is required to establish
one or more separate variable accounts to which it shall deposit is no distinction as to the taxability of the income derived by
all premiums it receives in connection with variable contracts an insurance company on the investment of its general fund
whereby, under the terms of that contract, the amount should from that derived from investment of funds coming from
variable contracts.
be allocated or applied to one or more of the designated separate
variable accounts. The assets and liabilities of each separate
variable account are required to be clearly identifiable and Income from the investment and re-investment of
distinguishable from the other assets (or accounts) and funds from variable contracts is taxed in the same manner as
liabilities of the insurance company offering a variable contract. any other income derived from the investment of the general
The assets cannot be made to answer for the liabilities of the fund of an insurance company. Hence, any income of the fund
insurance company arising out of any of its other businesses; that is not subject to a final tax is to be reported by the
assets are earmarked exclusively for the benefit of the owners insurance company as part of its taxable income subject to the
regular income tax of 35% based on net.
or beneficiaries of the variable contracts (Section 237, PD 1460).
192 Chapter III
For example, income received from offshore
investments of the variable accounts is generally an ordinary
income of the investing insurance company subject to the
regular income tax. The country of investment may subject
such income to tax in that country in accordance with its laws
or in accordance with the provisions of the tax treaty that the
Philippines has with that foreign country, but the income paid
to that country may be claimed as deductions or as tax credits
from the insurance company's income tax liability, subject to
certain limitations. If the income is subject to a final tax, the
same tax rate applies as if the income were received by the
insurance company.
APPLICABILITY OF The portion of the premiums collected or received by
PREMIUM TAX insurance companies on variable contracts in excess of the
amounts necessary to insure the lives of those named in the
variable contract is exempt from the 5% premium tax.
excess premium not The exemption is premised on the fact that the excess
subject to premium tax premium is not a payment,for a life insurance but is in fact a
savings of the insured, which is similar to bank deposits or
placements with banks. In fact, a variable life insurance
contract not only performs the traditional protection function
of life insurance, but also generates income for the individual
covered by such an insurance (Rodriguez, 1989). The nature
of the excess amount paid, therefore, may be viewed as an
investment, a savings, a deposit or a deposit substitute.
Considering that variable contracts are practically new
in the market, there are no clear rules (other than the exemption
of the excess premium from the premium tax) as to how these
are treated for tax purposes.
Particularly, it is unclear whether the excess premium,
which is in fact a savings or an investment, is taxed similarly as
bank deposits, investment, or deposit substitutes are. In
Insurance 193
a
accepting deposits or investments in the guise of premium
payments, would insurance companies be taxed similar to
banks and would that portion of the variable contract relating
to the savings portion be taxed similar to a bank deposit or a
deposit substitute? Or would the investment or savings feature
in variable insurance be a necessary consequence of the
business of insurance and would therefore not be taxed
separately? The second may be a more appropriate treatment.
As held in the case of Philippine American Acekient
Insurance, the lending of money at interest by an insurance
company constitutes a necessary incidentof its regular business
of insurance (Commissioner of Internal Revenue v. Philippine
AmericanAccidentinsurance Co., et. al., 2005). The samemay
be true with respect to accepting deposits pertaining to the
savings component of a variable contract. Clearly plough, any
amount of premium paid in excess of the amounts necessary
to insure the lives of those named in the variable contrast is
exempt from the premium tax (Section 123, Tax Code).
There are also no clear guidelines for the determination
of the amount "in excess of the amount necessary to insure the
lives of the insured." Questions such as "How is the excess
determined?" or "Who makes the determination?" or is the
determination of an actuary commissioned by the insurance
company acceptable to the BIR?" remain unanswered.
Interest income not subject to premium tax or VAT
Interest income arising from mortgages or loans
extended by insurance companies is not subject to either the
5% premium tax or the percentage tax (now VAT) imposed on
lending investors.
lending and investing is The lending of money at interest by an insurance
a necessary incident of company constitutes a necessary incidentof its regular business
insurance business and does not make it a lending investor subject to gross receipts
194 Chapter III Insurance 195
tax (GRT) under the old law, now VAT (Commissioner of
Internal Revenue v. Philippine American Accident Insurance
Co., et. al., 2005).
Corollary to this, it may be safe to say that insurance
companies are also not subject to GRT imposed on banks for
the intermediation fees received from the investment of the
deposits (in the guise of premiums, e.g., excess premium in
variable contracts) placed with them, for the reason that the
savings component of a life insurance premium is but a
necessary incident of the business of life insurance.
Also, the interest income received by an insurance
company from extending loans or mortgage to policyholders is
not subject to the 5% premium tax since the premium tax is
imposed only on the amount of premium received or collected
by the insurance company, and not on any other income,
including interest income from loans or investment.
Other income subject to VAT or 3% percentage tax
Any activity or transaction subject to VAT that is
conducted by an insurance company, not as an incidence of its
insurance business but as a separate and independent business,
is subject to VAT at 12%, unless exempt under Section 109 of
the Tax Code. If the total income from such transactions is not
more than P1.5 million in a given 12-month period, it shall be
exempt from VAT, but the same shall be subject to the 3%
percentage tax imposed under Section 116 of the Tax Code.
For example, rental income, service fees such as
management fees or consultancy fees, and sale of company cars
or assets (unless it is an isolated transaction) are subject to VAT
if the total income from these transactions exceeds P1.5 million
in a year. Otherwise, it is subject to a 3% percentage tax based
on gross.
Exemption of purely cooperative companies
from premium tax
Purely cooperative companies or associations are
exempt from the payment of premium tax and DST (more
discussion in DST section).
Cooperative companies or associations refer to
insurance companies that are solely operated or conducted by
members with money collected from among themselves and
solely for their own protection and not for profit (Section 123,
Tax Code).
mutual life insurance To be classified as a purely cooperative corporation or
companies are association exempt from the payment of premium tax and DST,
cooperative companies the following criteria must be met: (1) it shall be managed and
conducted by its members; (2) it shall be operated with money
collected from its members; and (3) it shall have, for its main
purpose, the mutual protection of its members and not profit.
In Commissioner of Internal Revenue v. Insular Life
Assurance Company, Ltd. (1998) and Commissioner of
Internal Revenue v. Sun Life Assurance of Canada (2003),
the Supreme Court (SC) ruled that mutual life insurance
companies, such as the petitioners in these cases, are actually
purely cooperative companies that are entitled to exemption
from premium tax and DST.
In a mutual life insurance, the members who are at the
same time the policyholders constitute both the insurer and
the insured. They contribute to a common fund, by way of
premium or assessments, from which all losses and liabilities
are paid. The ownership of the company is vested in the
members. The payment of dividends to members does not
imply that the company has for its main purpose the generation
of profits.
196 Chapter III
dividends are excess The theory of dividend in a mutual company differs
premiums returned to considerably from the one in connection with the ordinary
policyholders members
- corporate dividend. Such dividends are not dividends in the
accepted and ordinary sense of the word, but these represent
an excess premium or overcharge premium paid by the
policyholders and returned to them. Thus, the payment of
dividend to policyholders does not disqualify a mutual life
insurance company from being a purely cooperative company
exempt from premium tax and DST.
Mutual life insurance companies need not be registered
with the Cooperative Development Authority (CDA) to avail of
the exemption.
Agents of foreign insurance companies
Agents of foreign insurance companies (such as a fire,
marine or miscellaneous insurance agent) authorizedunder the
Insurance Code of the Philippines to procure policies of
insurance on risks located in the Philippines for companies not
authorized to transact business in the Philippines are subject
to twice the tax imposed on life insurance companies (Sections
123 and 124, Tax Code). In cases where owners of property
obtain insurance directly from foreign companies, said owners
are required to report to the IC and the BIR each case where
insurance has been so obtained, and to pay the 5% tax based
on premiums paid (Section 124, Tax Code).
It should be noted that regardless of the insurance
coverage, whether life or non-life, agents of foreign insurance
companies are subject to a premium tax at the rate twice as
that imposed on life insurance, that is, 10% if they procure
insurance policies from companies not authorized to do
insurance business in the Philippines. The imposition of a tax
double in rate is meant to discourage agents of foreign
insurance companies from engaging in unauthorized insurance
business in the country.
Insurance 197
VAT on Non-life Insurance Companies
In general
Premiums collected from non-life insurance policies are
subject to a VAT of 12%.
RA 7716 (May 5, 1994) provides for the exclusion of
non-life insurance premiums from the 5% premium tax,
subjecting it instead to the VAT. Prior to this, all insurance
premiums, whether pertaining to life or to non-life, were subject
to a premium tax on an aggregate basis. However, when the
Philippines shifted to the VAT system to replace the sales tax
system (which was characterized by so many types pf taxes on
transactions and was thus difficult to administer and comply
with), the government intended to subject, as a general rule,
all types of business activities to VAT.
As in the case of the banking sector, a number of issues
surfaced regarding subjecting the insurance sector to VAT.
Some of these issues relate to the determination of the
appropriate base for VAT purposes. More specifically, the lame
was that in the case of life insurance, there was difficulty in
determining the VATable base since insurance premiums
comprise of payments not only for the protection of the insared,
but a large portion of it is, in reality, a savings of the insured.
Thus, for valid reasons, life insurance premiums were exchnled
from VAT.
The exclusion of life insurance premiums from the VAT
coverage and their retention under the premium tax regime
reflect not only the real nature of life insurance as partly a
savings product, but also the intention to level the playing field
for all financial intermediaries and promote the growth Of life
or personal insurance, a development that is hardly realised In
this country given the high costs associated with securing an
insurance policy.
198 Chapter III
Value-added tax
Non-life insurance premiums received by insurance
companies are subject to VAT at the rate of 12% based on gross
receipts, and not to the 5% premium tax. For tax purposes, a
non-life insurance business is considered a sale of service
(insurance service) subject to VAT under the VAT system.
RMC 11-96 (January 15, 1996), which implemented the
provisions of the expanded VAT (EVAT), defines non-life
insurance companies to include the following:
1. Marine, fire and casualty insurance companies
2. Surety, fidelity, indemnity and bonding
companies
3. Professional reinsurers defined under Section
28o of the Insurance Code of the Philippines
(RR 07-95, December 9, 1995)
4. Mutual benefit associations
5. GOCCs engaged in the business of non-life
insurance
6. Nonstock, nonprofit organizations and
cooperatives engaged in the business of non-
life insurance
7. All other persons, whether individual, trust,
estate, partnership, association, joint venture,
or corporation engaging in the non-life
insurance business such as, but not limited to,
nonresident foreign persons rendering non-life
insurance services in the Philippines in the
course of their trade or business
Crop insurances are exempt from VAT. Life and
disability, as well as health and accident insurance, are not
subject to VAT but are subject to the 5% premium tax.
Insurance 199
GROSS RECEIPTS The 12% VAT is based on gross receipts. The term
"gross receipts" includes the total premiums collected, whether
paid in money, notes, credits or any substitute for money. The
following premiums are, however, excluded in the computation
of the gross receipts subject to VAT:
1. Premiums refunded within six months after
payment on account of rejection of risk, or
returned for other reasons to the person insured
2. Premiums on reinsurance of a company that
has already paid the tax
3. Premiums on account of any reinsurance if the
risk insured against covers property located
outside of the Philippines
4. DST and local taxes passed on by the insurance
company to the insured
5. VAT passed on to the insured
It may be noted that the above exclusions are the same
items excluded from the computation of gross receipts subject
to the premium tax in life insurance. DST, fire tax, local taxes
and VAT, which are normally passed on to the insured and
billed together with the premiums, are excluded from the
computation of the gross receipts subject to VAT (VAT Ruling
No. oo6-01, February 16, 2001).
REGISTRATION FOR An insurance company engaged in both life and non-
MIXED BUSINESS OF life insurance business is required to register both as a non-
LIFE AND NON-LIFE VAT and VAT taxpayer. Gross premiums from life insurance
are subject to the 5% premium tax (non-VAT), while gross
receipts from non-life premiums are subject to VAT. A
registration fee of Pi,000 (P5oo for non-VAT and P5oo for
VAT). is required to be paid annually. Each branch or sales
outlet is likewise required to pay the registration fee.
200 Chapter III
Insurance and reinsurance commissions are subject to
INSURANCE AND
VAT. This is explicitly clarified in Section 4.108-3(i) of RR 16-
REINSURANCE
05 (September 1, 2005) implementing RA. 9337, or the
COMMISSIONS
Reformed VAT Law. This clarification of the VATability of
commissions and reinsurance commissions received by
insurance companies finally puts to an end the long-standing
issue on its taxability.
insurance, reinsurance The VATability of these incomes has been the subject
commissions are of several appeals by certain sectors of the industry (especially
subject to VAT the reinsurance sector) with the BIR.
In the case of the reinsurance sector, their appeal is
based on the argument that the amounts received from
reinsurance are not actually in the nature of commissions but
are, in fact, reimbursements of expenses incurred by the direct
insurer in getting the contract of insurance, e.g., commissions
paid to agents. Since the income is shared among the direct
insurer and the reinsurers, the cost incurred to produce the
income is likewise shared. There is no service renderedby mere
sharing of the costs; thus, the amount received from the
reinsurer should not be subject to VAT.
Despite all these appeals, however, the BIR affirmed
its position that insurance and reinsurance commissions
received by life and non-life insurance companies are subject
to VAT.
Until the BIR repeals RR 16-05, insurance and
reinsurance commissions received by both life and non-life
insurance companies remain subject to VAT at 12%.
Professional reinsurers engaged in non-life insurance
PROFESSIONAL
REINSURERS ARE are subject to VAT on amounts they receive as reinsurance
premiums [RR 07-95 (December 9, 1995); RR 16-05], except
SUBJECT TO VAT
on reinsurance premiums received from an insurance company
that has already paid the VAT on the premium ceded.
Insurance 201
Professional reinsurers are subject to VAT under the
Tax Code. Professional reinsurers and the business of
reinsurance are not included in the enumeration of VAT-
exempt entities or transactions under Section 109 of the Tax
Code. Clearly, the business of reinsurance is covered under
the VAT system. Thus, a reinsurance company is required to
register as a VAT entity and file the quarterly VAT returns
required under the VAT law.
reinsurance premium is A reinsurance premium received by a reinsurance
exempt from VAT if VAT company on which VAT has already been paid by the direct
is already paid by direct insurer is exempt from VAT. A professional reinsurer that
insurer
receives income solely from reinsurance premiums, where the
reinsurance premium received has already been subjected to
VAT by the direct insurer, may not be liable to an output VAT.
Nevertheless, it is required to register as a VAT entity, file its
return, and declare its income from reinsurance as in exchadon
from the VATable base.
Being subjected to VAT has its pros and cons. For tax
efficiency, it may be better for a reinsurance company to be
subject to VAT, as opposed to non-VAT, because the input VAT
passed on to it by its suppliers, including the VAT passed onto
it by a nonresident foreign reinsurer, can be claimed as a tax
credit or as a refund from the BIR.
Similarly, non-life reinsurance premiums paid or ceded
to a foreign reinsurance company are subject to VAT. However,
since foreign reinsurance companies are not required to register
and file their tax returns in the Philippines, the VAT due on the
premium ceded is collected by way of withholding. The in%
VAT shall be withheld and remitted to the BIR by the local
insurance company by filing a BIR Form i600 (Monthly
Remittance Return of Value-Added Tax Withheld). (See more
discussions on withholding section.)
The requirement to withhold a 12% VAT on the
reinsurance premiums ceded to foreign insurance companies
 202 Chapter III
applies only to the business of non-life reinsurance (RR 16-05).
Life insurance is outside the coverage of the VAT system.
Consequently, reinsurance premiums cededto foreign reinsurance
companies where the object of the insurance is life, or any matter
related thereto, are not subject to a withholding VAT.
INPUT TAX ON VAT paid by an insured on purchases that are incurred
CLAIMS AND in connection with an insurance (such as repairs) and that are
LOSSES later reimbursed by the insurance company can be claimed by
the insurance company as an input tax, notwithstanding the
fact that the invoice or receipt is not in the name of the insurance
company (BIR VAT Ruling No. 040-99, April 8, 1999).
Therefore, since the proper claimant of the input tax is the
insurance company, the insured cannot claim the VAT paid,
notwithstanding the fact that the invoice or receipt is under its
name.
Allowing insurance companies to claim input VAT
credits on items pertaining to reimbursed claims and losses,
despite failure to have the receipts or invoices issued in the
name of the insurance company, may have its merits. However,
it may not be in accordance with the basic requirement in
claiming input tax credits under the VAT system, specifically
the requirement that claims for input VAT must be supported
by invoices or receipts issued in the claimant's name.
OTHER INCOMES Other incomes, besides premiums, that are received by
non-life insurance companies are likewise subject to VAT. This
includes rental income, sale of ordinary assets like equipment
and old furniture, and similar transactions.
1
Insurance 203
Withholding of creditable VAT
5% FINAL Premium payments made by the government or any of
WITHHOLDING VAT its political subdivisions, instrumentalities or agencies,
ON GOVERNMENT including GOCCs, are subject to a 5% final withholding VAT
MONEY PAYMENTS (prior to RA 9337, they were subject to a 6% creditable VAT),
and such amount withheld is required to be remitted to the
BIR by the payor of the premium, in this case the government
or any of its instrumentalities, agencies and GOCCs.
The 5% VATwithheld is considered a final VAT imposed
on the premium received. Being a final VAT, the premium
received is no longer considered a taxable income subject to
the 12% VAT.
The concept of a final VAT withholding was introduced
by RA 9337 as implemented by Section 4.114-2 of RR 16-05.
Any input tax directly related or allocable to the generation of
premiums subject to a final VAT is limited only to 5%. This is
presumptive input VAT the so-called 5% presumptive input VAT, which applies only
to government money payments. Any amount of input tax in
excess of 5% is not allowed as an input tax that can be credited
against output tax, but it shall be claimed either as an addition
(if in excess of 5%) or a deduction (if less than 5%) to cost.
With the general increase in VAT rate to 12%, it is
uncertain whether the final withholding VAT will be increased
by the full amount of 2% (making it 7%) or will remain constant,
thereby shifting the 2% increase to presumptive input tax, or
dividing this 2% increase equally between the final VAT and
the presumptive input VAT, making it 6% for final VAT and
6% for presumptive VAT. It should be noted, however, that
the rate of 5% as a final VAT is fixed in RA 9337. The
presumptive VAT of 5% (10% VAT less 5% final VAT) pertaining
to the remaining portion of the VAT rate of io% is contained in
the implementing regulations.
204 Chapter III
Considering this, it is more likely that the finaFVAT -
will be retained at 5% and the presumptive input VAT will be
increased to 7% (12% less 5% final VAT).
Non-life reinsurance premiums, being subject to VAT,
are likewise subject to the final VAT of 5% if paid by
government-owned and -controlled insurance companies, such
as the GSIS (BIR VAT Ruling No. 072-02, October 22, 2002).
However, a reinsurance premium may be exempt from
the 5% final withholding VAT if the VAT on the reinsurance
premium ceded is already paid by the direct insurer. This
exemption is premised on the argument that a reinsurance
premium is not subject to VAT if the VAT on the premium is
already paid by the direct insurer. For example, if the GSIS pays
the VAT on the direct premiums, it shall no longer be required to
withhold the 5% final VAT when it cedes part of the premium to
reinsurers. On the other hand, if the GSIS does not pay the VAT
on the direct premium, the GSIS shall withhold the 5% final VAT.
12% FINAL As already discussed, non-life reinsurance premiums
WITHHOLDING VAT are subject to VAT. The VAT due on reinsurance premiums
ceded to a foreign reinsurance company is to be withheld by
ON REINSURANCE
PREMIUM PAID TO the local insurance company and is to be remitted to the BIR
NONRESIDENTS by filing the Monthly Remittance Return of VAT Withheld (BIR
Form 160o) within ten days following the end of the month the
withholding was made. The VAT withheld and remitted to the
BIR may be claimed as an input tax credit by the local
reinsurance company that ceded the premium.
The duly filed BIR Form 1600 is enough proof (in lieu of
official receipt or invoice) for claiming an input tax if the ceding
company is a VAT-registered entity. Otherwise, the VAT withheld
and remitted using BIR Form 1600, and passed on to the local
insurance company by the foreign reinsurance company, shall
form part of the cost (Section 4.114-2(b)(2), RR 16-o5).
Insurance 205
DOCUMENTARY STAMP TAX
Base and rate
Insurance policies, both for life and non - life, are s
to documentary stamp tax (DST) at varying rates depending
on the object or risk insured against.
Table 3.3 shows the DST rates on documents issued by
insurance companies and pre-need companies (RA 9243, the
DST Rationalization Law).
Table 3.3
Type of Document
FIST
On life insurance policies — On all policies of insurance or other P0.50 on each P200, Of
-woof*
instruments by whatmer name the same may be called, whereby part thereof, of the amount of
an insurance shall be made or renewed upon any life or lives premium collected (Section 183, Tex
Code)
On policies of insurance upon property — On all policies of P0.50 on each P4, or fractional part
insurance or other instruments, by whatever name the same may thereof, of the amount of premium
be called, by which insurance shall be made or renewed upon charged (Section 184, Tax Code)
property of any description, including rents or profits against by
sea or inland waters, or by fire or lightning. This applies prodded
that no DST shall be collected on reinsurance contracts or any
instrument by which cession or acceptance of insurance risks
under any reinsurance agreement is effected or recorded.
On policies of annuities and pre-need plans - On all policies of P0.50 on each P200, or fractiorrat
annuities, or other instruments by whatever name the sale may part thereof, of the premium or
be called, whereby the annuity may be made, transferred or installment payment of contract pep
redeemed. collected.
On pm-need plans, P0.20 on eakee
P200 or fractional part thereof, of the
premium or contribution collected.
(Section 186, Tax Code)
206 Chapter III
Table 3.3 (continued)
Type of Document DST
On indemnity bonds — On all bonds for indemnifying a person, firm or P0.30 on each P4, or
corporation, which shall become bound or engaged as surety for the fractional part thereof, of the
payment of any sum of money, or for the due execution or premium charged (Section
perfoimance of the duties of any office or position or to account for 187, Tax Code)
money received by virtue thereof, and on all other of any description,
except such as may be required in legal proceedings.
On fidelity bonds and other insurance policies -
TAXABLE BASE:
PREMIUM
COLLECTED
(a) On all policies of insurance or bonds or obligations of the nature of
indemnity for loss, damage or liability made or renewed by any
person, association, company or corporation transacting the
business of accident, fidelity, employer's liability, plate, glass,
steam boiler, burglar, elevator, automatic sprinkler, or other branch of
P0.60 on each P4, or
fractional part thereof, of the
insurance (except life, marine, inland and fire insurance)
premium charged (Section
(b) On all bonds, undertaking or recognizance, conditioned for the
185, Tax Code)
performance of the duties of any office of position, for the doing or not
doing of anything therein specified
(c) On all obligations guaranteeing the validity or legality of any bond
or other obligations issued by any province, city, municipality, or
other public body or organization
(d) On all obligations guaranteeing any mercantile credits, which may
be made or renewed by any person, company or corporation
Life insurance policies
Prior to RA 9243, the DST on life insurance policy was
based on the amount insured or the face value of the insurance
policy. The system was criticized as costly to insurance buyers
considering that the DST due is imposed on the whole insurance
coverage and is required to be paid in full upon execution of
the policy. Since the DST is based on the total insured amount,
additional insurance coverage, such as those contained in riders
attached to the policy and which are determinable at the time
of the issuance of the policy, is subject to DST based on an SC
decision on the matter (Commissioner of Internal Revenue v.
Insurance 207
Lincoln Philippine Life Insurance Company, Inc., and the
Court of Appeals, 2002).
Likewise, since the DST attaches upon the execution of
the insurance contract, any DST paid on cancelled policies
beyond the six-month grace period are no longer recovered.
The amendment introduced by RA 9243, which
changed the taxable base for DST from one based on the face
of the policy to one based on premium collection, not only
makes the cost of DST more reasonable, but more importantly,
puts life insurance policy at par with property and other
insurance policies, the DST of which is based on the amount of
premium and not the insurance coverage.
The only difference is, while life insurance is based on
the amount of premium collected, property and other insurance
is based on the amount of premium charged. Thus, in the case
of non-life insurance policies, even premiums that are not
collected, but charged, are subject to DST. This is not the case
for life insurance.
It may also be noted that under RA 9243, the taxable
base for DST is synchronizedwith the taxable base for premium
tax.
The amendment introduced by RA 9243 changing the
taxable base to premium collection effectively removed the
difficulties in compliance experienced under the old law,
specifically on the taxability of riders to DST as ruled by the SC
in the case of Commissioner of Internal Revenue v. Philippine
Life Insurance Company, Inc. and the Court of Appeals (2002).
Likewise, it rendered nugatory a previous Court of Appeals (CA)
decision (philippine Home Assurance Corporation, et. al., v.
Court of rax Appeals and Commissioner of Internal Revenue,
1994), which ruled that the DST on insurance policies is a tax
208 Chapter III
on the privilege of conducting insurance business as well as on
the document, and that it becomes due and payable at the time
the transaction is had or accomplished, or at the time of the
issuance of the document. As amended, the DST is now based
on premiums actually or constructively collected.
Variable contracts
As clearly provided in the Tax Code, the amount of
premium in excess of the amounts necessary to insure the lives
of those named in the variable contract is not subject to a
premium tax. As regards the imposition of DST to variable
contracts, however, the Tax Code did not provide for exemption.
The portion of the premium received in excess of the amounts
necessary to insure the lives of those named in the variable
contract, although exempt from the premium tax, is subject to
DST.
DST on insurance policies covering properties
abroad
Insurance policies that cover properties situated outside
the Philippines and that are issued outside the Philippines are
not subject to DST even if the insurance company abroad that
issued the policy is a branch office of a domestic insurance
company. Where the property insured is situated outside the
Philippines, the DST does not apply. The requirement that DST
be paid regardless of where the document is made, signed,
issued or accepted applies only when the document pertains to
obligations arising from the Philippines, or when the property
is situated in the Philippines (BIR Ruling No. DA-288-o5, June
27, 2005).
Insurance 209
Documents and Transactions
Exempt from DST
As with most companies heavily burdened with DST,
insurance companies normally shift forward to the buyers the
tax burden of paying the DST, thus making insurance more
1
costly and unaffordable. Hence, to minimize the transaction
costs associated with taxes, and to encourage savings through
insurance, the following insurance documents and transactions
are exempted from DST by RA 9294:
Policies of insurance or annuities made or
granted by a fraternal or beneficiary socket?,
order, association or cooperative company,
operated on the lodge system or local
cooperation plan, and organized and conducted
solely by the members thereof for the exclusive
benefit of each member and not for profit
[Section 199(a), Tax Code]
In the cases of Insular Life Assurance, Ltd. and
Sun Life Insurance of Canada (Commissioner
of Internal Revenue v. Insular Life Assurance
Company, Ltd., 1998, and Commissioner of
Internal Revenue v. Sun Life Assurance
Company of Canada, 2003), the SC ruled that
mutual life insurance companies are
cooperative companies. Insurance policies
issued by mutual life insurance companies and
cooperatives are exempt from DST.
2. Assignment or transfer of any policy of
insurance if there is no change in the maturity
date, or in the remaining period of coverage,
from that of the original instrument [Section
199(f), Tax Code]
210 Chapter HI Insurance 211
Prior to RA 9243, any renewal or transfer of
insurance policies, regardless of whether or not
the transfer involves a change in the coverage
or maturity of the policy, is subject to DST at
the same rate as that applied to its original
issuance. Under RA 9243, the DST is due on
the renewal or assignment only if there is a
change in the maturity or coverage of the
insurance policy. A mere change involving the
insured, insurer or beneficiary does not make
the renewal or assignment subject to DST.
Special Rules on
Payment and Filing of DST
Use of metering machines
Similar to banks, insurance companies (including pre-
need, surety, fidelity and annuity companies) are required to
pay DST through the use of a metering machine and the online
electronic DST imprinting machine [Section 4(a), RR o9-00
(August 31, 2000)]. For further discussion, see section on
Special Rules on Payment and Filing of DST'in Chapter II,
Banks.
Insurance companies as statutory payors of DST
Again, similar to banks, insurance companies
(including pre-need, surety, fidelity, and annuity companies)
are designated as the statutory payors of DST in transactions
that are subject to DST of which it is a party. Under the concept
of "statutory payor," the insurance company is liable to remit
the tax to the BIR regardless of which party to the taxable
transaction or document actually paid the tax.
If an insurance company is one of the parties in a taxable
transaction subject to DST, the insurance company is
responsible for remitting the DST due on the transaction to
the BIR. If the insurance company is exempt from DST, it is
nevertheless required to remit the tax in the same manner as if
it were its own payment. If the insurance company fails to
collect and remit the tax from the taxable party, it is personally
liable for the tax. In addition, penalties (interest and
surcharges) may be imposed for failure to pay the tax [Section
3(0(4)(a) and (d), RR o9-00]. For further discussion, see
section on withholding tax in Chapter II, Banks
FIRE TAX
Insurance companies that sell fire, earthquake and
explosion hazard insurance are required to pay a fire tax
equivalent to 2% of premiums collected (excluding reinsurance
premiums), with the proceeds of the tax accruing to the
Integrated National Police (now the Department of Interior and
Local Government) and administered by the Bureau of Fire
Protection (BFP). The tax is meant to support the manpower,
infrastructure and equipment requirements of the Fire Service
(PD 1185, otherwise known as the Fire Code of the Philippines,
August 26, 1977).
212 Chapter III
TAXATION OF BANKS VS.
INSURANCE COMPANIES
Premium Tax vs. Gross Receipts Tax
Notwithstanding the efforts of the government to
provide a level playing field for all financial intermediaries, the
business of life insurance is still disadvantaged compared to
banks and other financial intermediaries as far as business
taxation is concerned. While banks and insurance companies
are both subject to almost the same tax rate of 5% [5% GRT
ON or 7% for certain incomes) for banks and 5% premium tax
for life insurance] and are both based on gross amounts, the
determination of the taxable base upon which the GRT or the
premium tax is imposed differs.
Banks are subject to GRT only on the interest income
and other intermediation fees they receive. Investments,
amounts received as deposits, and amounts held in trust or
under management do not form part of the gross receipts
subject to GRT.
Life insurance, in contrast, is subject to a 5% premium
tax on gross premium received that is, as discussed earlier,
composed of insurance and savings. The premium paid under
a life insurance is practically a deposit or savings for future
investment with only a little component of insurance.
Thus, to equate the taxation of life insurance with that
of banks, only that portion of the premium representing service
income from insurance should be subject to the 5% premium
tax, while that portion representing savings or deposits should
be excluded from gross income in the same manner that
amounts received by banks as deposits, investments or savings
are not subject to GRT.
Insurance 213
Long-term Investments
Interest income receivedby individuals from long-term
deposits with banks in the form of savings, common or
individual trust funds, deposit substitutes, investment
management accounts and other forms prescribed by the UP
is exempt from income tax. This exemption, however, does
not apply if the fund or savings are kept with financial
institutions other than banks. This exemption, therefore, gives
an advantage to banks vis-a-vis other financial intermediaries
such as insurance, investment or financing companies, and
makes banks the preferred outlet for savings or investment.
Oualified Tax-exempt Retirement
and Pension Trusts
Although authorized to service the retirement plans for
employees, insurance companies cannot hold qualified tax-
exempt retirement and pension trust funds, because the
relationship between an insurance company and a policyholder
is that of an insurer-insured and not a trustor-trustee. As
already discussed, only trusteed retirement plans are 'welded
to avail of the tax exemptions given to employee retirement
funds. (See discussion on tax qualified retirement plans under
the income tax section of this chapter.) This greatly limits the
ability of insurance companies to compete with banks in
attracting long-term savings.
214 Chapter III
EMERGING INSURANCE BUSINESS
Pre-need Companies
element of contingency
not present in pre-need
plan
The pre-need business in the Philippines
The contribution of pre-need companies to the growth
and development of the capital or financial market cannot be
emphasized enough. By investing the funds that they collect
from buyers of pre-need plans, these companies are able to
provide a pool of funds that can be used to finance businesses
or other economic activities. Pre-need companies provide
services to planholders by managing the funds invested by them
and making payments at the time of need or upon maturity of
the contract.
Pre-need companies are corporations registered with
the SEC and are authorized to sell or offer for sale pre-need
plans, whether single plan or multi-plan (RR 16-05).
pre-need plan A pre-need plan is a contract that provides for the
performance of future services or the payment of future
monetary considerations at the time of actual need, for which
the planholder pays in cash or installment at stated prices, with
or without interest. The object of pre-need plans may include
life, pension, education, interment and other plans that the SEC
may, from time to time, approve (RA 8799, otherwise known
as the Securities Regulation Code, July 19, 2000). It is related
to events that are likely to happen at any time in the future,
such as education, interment, burial services or pension upon
retirement.
A pre-need plan is not exactly the same as an insurance
contract. Unlike in the case of insurance, which is dependent
Insurance 215
on a contingency, a pre-need plan insures an object or
expenditure that is very likely to happen in the future and for
which the insured or the buyer needs to save, insure or protect
itself.
As defined by the Insurance Code, an insurance
contract requires the presence of a contingent or unknown
event that would indemnify a person having an insurable
interest or create a liability against that person. This element
of contingency is not present in a pre-need contract. It is for
this reason that while insurance companies are under the
supervision and regulation of the IC, pre-need companies are
under the supervision and regulation of the SEC. They are
considered dealers in securities. The emerging proposal in this
connection, however, is to put pre-need companies under the
umbrella of the IC, given the fact that pre-need, plans are
contracts for protection from liabilities that are likely to happen.
Classification
The following types of pre-need plans are prevalent in
the Philippines:
1. A life or memorial plan is commonly known as
a family protection program that guarantees
ample financial resources for the payment or
delivery of memorial services in the event of the
death of the planholder.
Under a pension plan, the planholder remits
fixed contributions for a definite period of time
to guarantee payment of pension benefits,
which may be a pre-determined amount, in
lump sum or monthly pension, or a
combination of both, as soon as the planholder
reaches the retirement age.

216 Chapter III
Under an educational plan, the buyer of the plan
3.
(usually called the sponsor) pays today, in lump
sum or in installment, the price of the
designated scholar's future education. There
are two types of pre-need educational plans:
a. A traditional educational plan guarantees
the payment of the tuition fee of the
designated scholar whatever its cost will be
in the future.
b. A fixed-value educational plan guarantees
the payment of a definite amount in the
future in exchange for the payments made
by the sponsor based on the present value
of the guaranteed amount. Fixed-value
educational plans are usually sold in
denominations of, or units worth, Pio,o00
each, which the sponsor may wish to
increase if the sponsor thinks the amount
is not adequate to cover the cost of the
scholar's education in the future.
Other types of pre-need plans that have
4-
emerged lately in the Philippine market are the
pre-need travel plan and the interment and
cremation pre-need plans.
Income tax and other taxes
The generalrules on income tax, MCIT and withholding
taxes that are applicable to banks and insurance companies also
apply to pre-need companies with respect to income derived
by them as such.
The income of preleed companies may come from a
variety of sources, such as: (i) income from the sale of pre-
Insurance 217
need contracts, (2) other operating fees such as handling fee,
new issue fee, amendment or reinstatement fee, (3) portion of
its contractual liability on plans that have lapsed for more than
the predetermined number of years as approved by the SEC,
(4) commission or referral income, and (5) investment income.
The determination of the MCIT liability of pre-need
companies is similar to insurance companies. (See Mal'
discussion in this chapter.)
Likewise, income from investments and other passive
income of pre-need companies are taxed similar to banks and
insurance companies (see related discussion in Chapter II,
Banks). Pre-need companies are also governed by the same
rules that are applicable to banks and insurance companies with
respect to their withholding tax obligations on income
payments.
As regards their liability to IAET, pre-need companies,
unlike banks and insurance companies, may be subject to the
10% IAET. While there is an express provision that the tar
shall not apply to nonbank financial intermediaries/institutims
(NBFIs) and insurance companies, pre-need companies,
despite their role as financial intermediaries, are classifiedboth
by the BIR and by the SEC as dealers in securities (RMC 13-96,
January 15, 1996). Dealers in securities are not considered in
the category of NBFIs or insurance companies, for tax purposes.
Value-added tax
pre-need companies The SEC treats pre-need companies as dealers in
are dealers in securities securities. The BIR gives the same treatment to such companies
for VAT purposes (RMC 13-96, January 15, 1996).
Recently, however, under RR 16-05 (November 1,
2005), pre-need companies were carved out from the section
•
218 Chapter III
on taxation of dealers in securities and were instead put in a
separate section as a distinct type of a seller of service. It is not
clear, though, whether the act of placingthem in a separate section
removes them from the coverage of dealers in securities. If they
are not dealers in securities, what are they? Are they non-life
insurance companies? RR 16-o5.does not clearly say so.
Being a seller of service, a pre-need company is subject
to VAT based on gross receipts from premiums or payments
received from the planholders (RR 16-05). The VAT rate is
12%.
' gross receipts As a general rule, the term "gross receipts" refers to the
receipt, actual or constructive, of items constituting gross
income. RR 16-05 failed to clearly define the taxable gross
receipts of pre-need companies, specifically, whether the trust
fund contribution as required by the SEC is excluded from the
gross receipts subject to VAT.
This was, however, clarified in a subsequent ruling (BIR
Ruling No. DA-o27-o6, January 31, 2006), which adopted the
trust fund contributions same rule laid down under RMC 13-96: contributions to a trust
are excluded from the fund, as required by the SEC to be set up independently by pre-
VATable base need companies, are not part of the gross receipts subject to
VAT.
Going back to the basic definition of gross receipt, which
pertains only to the receipt of items constituting gross income,
there is justifiable basis for the exclusion of the contributions
to the trust from the VATable base considering that these are
not receipts of income but are receipts of funds put in trust
with pre-need companies by their planholders, which the pre-
need companies are duty bound to return.
The real intermediation or insurance income (which is
a service income) pertains only to that amount of premium
received net of the amount contributed to the fund. That
portion of the premium, which by law is required to be put in a
Insurance 219
separate trust fund for the planholders, is similar to a fund put
in trust with a bank by a depositor or investor. Bank deposits,
savings and investments with financial intermediaries are
beyond the reach of business taxation (GRT or VAT) since these
do not constitute income to the financial intermediary. The
same argument holds true for the savings portion of the
premium received from life insurance. (See discussion under
life insurance in this chapter.)
The exclusion of contributions to a trust fund from gross
receipts subject to VAT emanates from the very nature of the fund.
First, the fund is a mandatory requirement by law and
is required to be set up independently to guarantee the delivery
of benefits to the planholders. The SEC requires pre-need
companies to make a deposit to a trust fund to be established
for each type of plan with a minimum limit of 45% of the amount
collected for life plan and 51% of the amount collected for other
plans, unless a higher deposit contribution is determined by
the actuary and duly approved by the SEC. In the case of
installment payments, the minimum deposits required are on
a graduated rate ranging from 5% to 70% for life plan, and 5%
to So% for otherplans depending on the portion of the contract
price collected.
Second, the trust fund is established solely for the
account of the planholders. No withdrawals are allowed to be
made from the trust fund except for paying the benefits of the
planholders such as monetary consideration, the cost of services
rendered or property delivered, trust fees, bank charges and
investment expenses in the operation of the trust fund,
termination values payable to planholders, annuities,
contribution of cancelled plans to the fund and taxes on trust
fund (New Rules on the Registration and Sale of Pre-need Plans
under Section 16 of the Securities Regulation Code).
Another argument for the exemption of the trust fund
contribution from VAT is from a legal point of view. A law that
 220 Chapter III
remains substaniially-the-same-as the prior-law should-be-given Documentary stamp tax
the same meaning as that of the prior law. Thus, the interpretation
given by RMC 13-96 to the provisions of the EVAT law (which is
the same as the current law) excluding trust fund contributions
from the VATable base of pre-need companies should still apply
since there is no change in the law.
Basically, there is no change in the taxation of pre-need
companies under the old VAT law (RA 8424) as compared with
the Reformed VAT law (RA 9337, as implemented by RR 16-05).
INVOICING To be excluded from the taxable base subject to VAT,
however, the amount of such contribution to the trust fund shall
be indicated in the VAT official receipt issued by the pre-need
company. Otherwise, the entire amount received is subject to
VAT (RMC 13-96). The requirement to indicate the amount of
trust fund contribution in the official receipt as a prerequisite
for the exemption from VAT cannot be dispensed with (BIR
VAT Ruling No. 026-96, September 23, 1996).
In addition, the phrase "tax-exempt" corresponding to
the amount contributed to the fund shall be indicated clearly
in the official receipt. Otherwise, the whole amount is subject
to VAT (RR 16-05).
GENERAL All other provisions of RA 9337 that are generally
PROVISIONS OF VAT applicable to all industries—such as the 70% input tax
LAW APPLY limitations, input tax spreading on capital goods, requirements
of invoicing—shall apply to pre-need companies.
Insurance 221
A policy of annuity is subject to DST at the rate of Po.so
on each P2oo, or fractional part thereof, of the premium or
installment payment of contract price collected. In the ease of
pre-need plans, the rate is P0.20 on each P200, or fractkaial
part thereof, of the premium or contribution collected (Section
186, Tax Code, as amended by RA 9243).
RA 9243 introduced significant amendments on the
DST liability of pre-need plans. It reduced the DST rate from
Po.50 to Po.20 (a 6o% cutback) on each P200. It also cheat*
the taxable base: where it was previously based on the value or
amount of the plan, it is now based on the premium or
contribution collected. Compared to life insurance, which is
the type of insurance more akin to pre-need, the TEST
of pre-need plans is lower by Po.3o on each P200, or fractional
part thereof.
Health Maintenance Organizatio
Nature of business
A health maintenance organization (HMO) generally
arranges the provision of health care services to its planholliers
or members in exchange for pre-negotiated, prepaid
membership fees. Health care services include preventive,
outpatient, inpatient and dental care services, which are
provided by a network of independent health care providers
such as hospitals, clinics, and individual health care
professionals previously accredited and contracted by an HMO
to perform specified services to members/planholders (RIR
VAT Ruling No. 018-98, June 23, 1998).
222 Chapter III Insurance 223
HMOs are not providers For tax purposes, HMOs are classified as service
of medical services contractors and not as providers of medical services. HMOs
only arrange the provision of pre-need health care services to
their members for a fixed fee and a specified period, but they
do not render the medical services themselves. The actual
medical services are performed by hospitals, clinics and medical
professionals that are contracted and accredited by the HMOs
to provide the service to their members.
In choosing which to accredit, HMOs actually set the
parameters, rules and guidelines for the accreditation of
participating clinics and hospitals. HMOs do not actually render
medical services but merely act as conduits between the members
and their accredited hospitals and clinics (Philippine Health Care
Providers, Inc., v. Commissioner of Internal Revenue, 2002; and
BIR VAT Ruling No. 018-98, June 23, 1998).
However, in a recent ruling (Commissioner of Internal
Revenue v. Philippine Health Care Providers, Inc., 2004), the
Court of Appeals (CA) ruled that an HMO is a provider of non-
life insurance services, and not a service contractor. This ruling
may support efforts of various sectors to include HMOs under
the supervision and regulation of the IC, in addition to the
Department of Health (DOH), to which they are currently
attached. (Note: The CA decision on the case mentioned above
is pending appeal with the SC.)
Income tax and other taxes
An HMO is subject to income tax, MCIT, IAET, BPRT
and withholding taxes in the same manner as any other
corporation. Its principal source of income consists of
membership fees received from members or planholders, while
significant sources of deductible expense are the payments to
hospitals, clinics and medical professionals for medical services
rendered to members.
Value added tax
-
HMOs are service contractors subject to 12% VAT based
on their gross receipts. Gross receipts refer to the total amount
of money, or its equivalent, representing the service fee actually
or constructively received during the taxable period for the
services performed or to be performed for another person,
excluding the VAT.
In the case of HMOs, the gross receipts subject to VAT
include the total amount received as enrollment fee,
membership or application fee paid by members undiminished
by any amount paid or payable to owners or operators of
A hospitals, clinics, medical and dental practitioners, plus other
charges received [Section 4.108-3(k), RR 16-o5; RMC 56-02,
December 13, 2002; VAT Ruling No. 18-98, June 23, 1998; and
Philippine Health Care Providers, Inc., v. Commissioner of
Internal Revenue, 2002].
All VAT rules and regulations applicable to sellers of
services such as those pertaining to input taxes, zero-rated sales,
exempt sales and invoicing also apply.
EXEMPTIONS OF Considering that HMOs are service contractors and not
MEDICAL SERVICES providers of medical services, the VAT exemption given to
DO NOT APPLY TO medical, dental and hospital services under Section 109 of the
HMOs Tax Code does not apply. The exemption from VAT pertains
only to those actually performing medical, dental and hospital
services such as accredited hospitals, clinics and medical
professionals that are contracted by an HMO to render medical
and hospital services.
Since HMOs merely arrange for the provision of said
services, they are not considered providers of medical, dental
or hospital services and are therefore not exempt from VAT
(VAT Ruling No. 18-98, June 23, 1998).
224 Chapter III
HMOs AS NON-LIFE In Philippine Health Care Providers, Inc., u.
INSURANCE Commissioner of Internal Revenue (2004), the CA ruled that
PROVIDERS membership agreements issued by HMOs to their members
are non-life insurance contracts.
The tax implication of classifying the membership
agreement as a non-life insurance contract affects not only the
liability of an HMO to DST (see DST discussion below), but
also the proper tax treatment of its income for VAT purposes.
While a service contractor and a non-life insurance
company are both subject to a 12% VAT, the basis of the gross
receipts on which VAT is imposed may differ. For example,
HMOs, as service contractors, are taxed on gross receipts
without any deduction. Insurance companies, on the other
hand, are allowed certain items of deduction including amounts
refunded within six months from date of payment (see VAT on
non-life insurance companies).
Documentary stamp tax
DST on non-life As mentioned, the CA held in the case of Philippine
Health Care Providers that the membership agreement between
insurance applies
an HMO and its members is a contract of non-life insurance.
This ruling is based on a previous SC ruling (379 SCRA 356,
363, March 18, 2002), which held that the health care
agreement between an HMO and its members is in the nature
of non-life insurance, which is primarily a contract of indemnity
because once the member incurs hospital, medical or any other
expenses arising from sickness, injury or other stipulated
contingent, the health care provider (the HMO) pays for the
same to the extent agreed upon under the contract. In the case
of HMO agreements, the insurable interest of the members in
obtaining the health care agreement is their own health. (Note:
the case of Philippine Health Care Providers is pending appeal
with the SC.)
Insurance 225
As such, HMO membership agreements are subject to
DST at the rate of P0.50 on each P4, or fractional part thereof,
based on the amount of membership or enrollment fee charged
(Section 185, Tax Code). DST is due even on membership
agreements in electronic format (Section io, RR 13-04,
December 23, 2004).
GOVERNMENT INSURANCE COMPANIES
The GSIS and the SSS
Tax exemptions
EXEMPTIONS UNDER The Government Service Insurance System (GSIS) and
THE GSIS AND SSS the Social Security System (SSS) provide social insurance
CHARTERS coverage to government and private sector employees,
respectively.
The GSIS was established on November 14, 1935, under
Commonwealth Act No. 186, to promote the welfare of
government employees through a program of social insurance.
Pursuant to RA 8291 (May 30,1997), the GSIS enjoys a
exemption from broad spectrum of tax privileges such as exemption from all
all taxes
taxes, assessments, fees, charges or duties. Notwithstanding
any law to the contrary, the GSIS, its assets, revenues including
all accruals thereto, and benefits paid are exempt from all taxes,
assessments, fees, charges or duties of all kinds. These
exemptions, which are meant to free the GSIS from the financial
burden of taxation so that it can fully devote its resources to
226 Chapter III
the promotion of the welfare of government employees insured
with it, are deemed to apply continuously unless expressly and
specifically revoked by another law.
On the other hand, the SSS was established on June
18, 1954 (RA1161) to establish, develop, promote and perfect a
sound and viable tax-exempt social security system that
promotes social justice and provides meaningful protection to
private sector employees and their beneficiaries against the
hazards of disability, sickness, maternity, old age, death and
other contingencies resulting in loss of income or financial
burden.
Pursuant to Section 16 of RA 8282 (May 1, 1997), the
SSS also enjoys a broad spectrum of tax privileges. All of its
assets and properties, contributions collected and all accruals
thereto, and income or investment earnings therefrom,
supplies, equipment, papers and documents are exempt from
any taxes, assessments, fees, charges or customs and import
duties. No tax measure enacted of whatever nature shall apply
to the SSS unless it expressly revokes the declared policy of the
State granting tax exemption to the SSS. Any tax assessment
imposed against the SSS shall be null and void.
As with the GSIS, the tax privileges of the SSS are meant
to free it from the financial burden of taxation so that it can
devote all of its resources to the pursuit of its mandate.
EXEMPTIONS UNDER Other than the tax exemptions containedin the charters
THE TAX CODE of the SSS and the GSIS, their exemption to income taxes is
likewise provided under the Tax Code [Section 27(C)]. Tax
privileges of the GSIS and the SSS include the following:
1. Exemption from the FWT on their interest
income from bank deposits and deposit
substitutes (RMC 45-86, December 5, 1986,
Insurance 227
which implemented Presidential Memorandum
Order No. 42, September 25, 1986, re: tax
privileges of the GSIS and the SSS; refer also to
BIR Ruling Nos. 261-86 and 371-87, dated
November 26, 1986 and November 19, 1987,
respectively)
2. Exemption from GRT or VAT on interest
income received by the SSS and the GSIS from
their borrowers on their various lending
programs (BIR VAT Ruling No. 028-04,
October 2o, 2004). However, they are not
exempt from VAT passed on to them on their
purchases of goods and services from VAT-
registered persons.
The exemption from VAT applies only to direct
taxes or taxes to which they are directly liable
and does not cover indirect taxes such as the
VAT passed on to them as part of the cost of
their purchases (BIR VAT Ruling No. 025-99,
March 15, 1999).
3. Exemption from CGT and DST on the sale or
disposition of the real estate acquired assets.
However, as regards DST, the other party to the
taxable document who is not exempt shall be
directly liable to DST (BIR Ruling Nos. 042-98,
April 13, 1998, and DA-166-02, September 17,
2002).
4. Exemption from DST on policies or any taxable
transaction or document issued by them.
However, while the GSIS and the SSS are
exempt from DST, the other party to the
transaction, if not exempt, is liable to DST (BIR
Ruling No. DA-166-02, September 17, 2002).
228 Chapter III Insurance 229
Exemption from-real-property taxes-on-its-real
properties unless it is being used by other
taxable persons, such as when it is leased for
residential purposes (DOJ Opinion No. 165,
series 1994 and DOF-BLGF Opinions dated
June 17, 1997, July 31, 2003, and November 7,
2oo3)
Benefits received from the SSS and the GSIS
benefits received are Benefits received, or enjoyed, from the SSS and the
exempt from tax GSIS in accordance with the provisions of RA 8282 and RA
8291, respectively, are excluded from gross income and
therefore exempt from tax [Section 32 (B)(6)(e) and (f), Tax
Code]. As provided under both RAs, all benefits paid by the
SSS and the GSIS shall be exempt from all kinds of taxes, fees
or charges and shall not be liable to attachments, garnishments,
levy or seizure by, or under any, legal or equitable process either
before or after the receipt of the benefit, except to pay any debt
due the SSS or the GSIS [Section 16, RA 1161 (June 18, 1954) as
amended by FA 8291 (May 30, 1997)•
Contributions to the SSS and the GSIS
Section 32(B)(7)(f) of the Tax Code explicitly exempts
from withholding tax on compensation the GSIS and SSS
contributions and union dues of their members. The tax
exemption covers not only the regular contributions, but also
the optional contributions made by members.
However, payments for the GSIS Educational Plan and
the GSIS Memorial Plan, which are not in the nature of
contributions but are premiums paid for educational and
memorial plans, are part of the employees' compensation
subject to withholdingtax. Only premiums paid for health and/
or hospitalization insurance not exceeding P2,400 per family,
or P200 per month, paid during the taxable year by the taxpayer
for himself, including his family, are allowed as deduction from
gross income under Section 34(M) of the Tax Code (BIR Rtding
No. 002-99, January 12, 1999).
As financial intermediaries
Both the GSIS and the SSS play an important role in
the promotion and development of the financial/capital madret
in the Philippines, as their funds are stable sources of
investments. However, because of the broad tax privileges they
enjoy, they pose unfair competition to other financial
intermediaries. For instance, the GSIS operates a property
insurance that competes with private non-life insurance
companies. There was also a time when the GSIS operated a
pre-need educational plan that competed with the business, of
private pre-need companies. (There are clamors to revive this
operation of the GSIS to help low-income government
employees secure the educational needs of their dependents.)
Philippine Deposit
Insurance Corporation
The Philippine Deposit Insurance Corporation (PM)
is in charge of insuring the deposits placed in banks to protect
the depositors in case the depository bank is unable to meet its
deposit liabilities (RA 3591, June 22, 1963). The objective of
establishing the FDIC is to encourage people to put their money
in the banking system with an assurance that, if the bank cannot
fulfill its obligation to return the amount deposited, the PDIC
will pay them. The insured amount, however, is a maximum
amount of only P250,000 (RA 9302, June 27, 2004).
230 Chapter III
PDIC subject to regular
taxes on non-life
To enable the PDIC to effectively carry out its mandate,
it was granted certain tax privileges, which were, however,
insurance withdrawn by PD 1931 (general withdrawal of the tax privileges
of government entities, June 11, 1984). The withdrawal was
reiterated by EO 93 (general withdrawal of the tax privileges of
government and private entities, December 17, 1986).
Thus, the PDIC is now subject to all taxes imposed on
non-life insurance companies, such as income taxes, VAT, DST,
local taxes, and withholding taxes. In fact, the BIR has assessed
the PDIC for back taxes amounting to P7.6 billion, representing
unpaid VAT, income tax and penalties (Salvosa, 2006).
Philippine Crop
Insurance Corporation
The Philippine Crop Insurance Corporation (PCIC) was
created by PD 1467 (June 11, 1978) to provide socialized
insurance coverage for crops and livestock. Premium rates are
subsidized by the government.
Similar to the PDIC, the PCIC was granted tax privileges
under PD 1467, but these privileges were subsequently
withdrawn by PD 1931 and EO 93 on account of the
government's fiscal problems. Presently, the PCIC is subject to
tax like any other insurance company.
With respect to the taxation of gross premiums earned,
crop insurance is
exempt from VAT however, the PCIC is not subject to the 12% VAT imposed on
non-life insurance companies with respect to premiums it
receives for crop insurance.
231
CHAPTER
IV Financing Companies
CLASSIFICATION AND DEFINITION
financing companies "Financing companies are corporations (except banks,
defined investment houses, savings and loan associations, insurance
companies, cooperatives and other financial institutions organized
or operating under special laws) that are primarily organized for
the purpose of extending credit facilities to consumers and to
industrial, commercial or agricultural enterprises by: (i) direct
lending; (2) discounting or factoring commercial papers or
accounts receivables; (3) buying and selling contracts, leases,
chattel mortgages, or other evidences of indebtedness; or (4)
financial leasing of movable and immovable property."
(underscoring supplied) [Revenue Regulations (RR) No. 09-04
(June 21, 2004) and RepublicAct (RA) No. 8556, otherwise known
as The Financing Company Act of 1998, February 26, 1998].
primary business as It must be noted that financing companies refer only
financing company to those engaged primarily in financing activities as mentioned
in its definition. Thus, any other entity engaged in the same
financing activities not as its primary business, but as an
incident to its main or secondary lines of business, is not to be
regarded as a financing company (BIR Ruling No. DA-533-o4,
October 25, 2004).
As provided under the Financing Company Act of 1998,
"no person, association, partnership or corporation shall hold
itself out as doingbusiness as afinancing company, or afinance
and investment company, or any other title or name tending
to give the public the impression that it is engaged in the
operations and activities of a financing company, unless

232 Chapter IV
authorized" based on the provisions of RA 8556 [Section 7(c),
RA 8556]. For purposes of this chapter, the discussions on
financing companies shall refer only to financing companies
registered under the Financing Company Act of 1998.
Receivable financing is a mode of extending credit
through the purchase by, or assignment to, a financing company
of evidence of indebtedness or open accounts by discounting
or factoring.
Discounting is a type of receivables financing whereby
evidence of indebtedness of a third party, such as installment
contracts, promissory notes and similar instruments, is
purchased by, or assigned to, a financing company in an
amount, or for a consideration, less than their face value.
Factoring is a type of receivables financing whereby
open accounts not evidenced by a written promise to pay
supported by documents such as, but not limited to, invoice of
manufacturers and suppliers' delivery receipts and similar
documents, are purchased by, or assigned to, a financing
company in an amount, or for a consideration, less than the
outstanding balance of the open accounts [RA 5980 (August 4,
1969), otherwise known as the Financing Company Act, as
amended by RA 8556 (February 26, 1998), and its
implementing regulations; see also RR 09-04 (June 21, 2004),
and BIR Ruling No. DA-533-04 (October 25, 2004)].
The Business of Financing Companies
Unlike banks, finance companies acquire most of the
funds needed for their lending operations from the sale of
commercial papers and short-term debt in the capital markets,
rather than directly from depositors. They can, however, engage
Financing Companies 233
in quasi-banking (QB) activities, money market placements,
trust operations, or provide foreign currency loans subject to
existing laws and regulations promulgated by the Bangko
Sentral ng Filipinas (BSP).
quaSi-banking QB activities refer to borrowing of funds from 20 or
more personal or corporate lenders at any one time, through
the issuance, endorsement or acceptance of debt instrument
of any kind other than deposits for the borrower's own account,
or through the issuance of certificates of assignment or similar
instruments, with recourse, or of repurchase agreements for
purposes of relending or purchasing of receivables and other
similar obligations. Note that commercial, industrial and other
non-financial companies shall not be considered performing
QB functions if they borrow funds through any of these means
for the limited purpose of financing their own needs or the
needs of their agents or dealers [Section 22(X), Tak Code),
Financing companies serve several distinct segments
of the financial services sector. For example, sales finance
companies purchase the installment sales contract of retail
merchants at a discount. Commercial finance companies, also
known as commercial credit companies, make loans to
wholesalers and manufacturers secured by assets of the
business (asset-based lending) and engage in lease financing.
Credit receivables of finance companies are, in fact, the basis
of many asset-backed securities being traded in the capital
markets as ordinary bonds and notes. In the case of captive
finance companies (that is, finance companies financing their
dealers' inventory or their customers' purchases), they provide
direct financing, sometimes at below-market rates, to
consumers buying the manufacturer's goods (Fitch, 2000).
Financing companies are generally under the
administrative supervision of the Securities and Exchange
Commission (SEC). However, the following financing
companies, including their branches, agencies, extension
offices or units, are subject to applicable rules and regulations
234 Chapter IV
of the BSP and must comply with BSP requirements prior to
issuance by the SEC of their Certificate of Authority to Operate
as a Financing Company:
i. Financing companies with QB licenses
2. Financing companies that are subsidiaries/
affiliates of banks
3. Financing companies that are subsidiaries/
affiliates of nonbank financial intermediaries/
institutions (NBFIs) with QB license
4. Financing companies with authority to engage
in trust operations
MCIT is 2% of gross
income
TAXES
Income Tax
Regular income tax
Like other financial intermediaries, financing
companies are subject to tax based on net taxable income (gross
income less allowable items of deduction under Section 34 of
the Tax Code) at the rate of 35%.
The income of financing companies is mainly from
interest from financing activities, rentals (in the case of finance
lease), discount revenue from discounting or factoring of
receivables, and all other income incidental to its financing
activities. The more significant items of deduction are interest
expenses and depreciation of leased properties in the case of
finance leases.
Financing Companies 235
The discussion on interest arbitrage in Chapter II,
Banks, may apply to financing companies considering that
similar to banks, the interest expense is a direct cost of business
operations. The interest arbitrage provision of the Tax Code,
which requires interest expense deduction to be reduced by a
certain percentage of the interest income subject to a final tax,
may not apply, because interest expense is a direct cost of
financing companies. Also, the same rule on deduction for bad
debts applies. (See income tax section in Chapter II, Banks.)
Minimum corporate income tax
Financing companies are subject to the minimum
corporate income tax (MCIT) at the rate of 2% of gross income.
For MCIT purposes, the gross income of financing companies,
as with other sellers of service like banks and insurance
companies, refers to gross receipts less returns, allowances, and
cost of service.
Gross receipts refer to actual or constructive receipts
representing interests, discounts, and all other items treated
as gross income under Section 32(A) of the Tax Code that are
not subject to a final withholding tax (FWT). The cost of services
allowable as deduction from gross receipts refers to those
directly and exclusively incurred in the lending, financing and
generating of investment income not subject to final tax, and
is limited to: (1) salaries, wages and other employee benefits of
personnel directly doing such functions, and (2) interest
expense [Revenue Memorandum Circular (RMC) No. 04 - 03,
December 31, 2002].
As in the case of other services, it may be noted that
while the definition of taxable gross receipts is very broad, the
cost of service allowed as deduction from gross sales is very
restrictive. It only includes salaries, wages and benefits of
personnel directly and exclusively performing the lending,
236 Chapter IV Financing Companies 237

financing or investment activities. It does not include the Improperly Accumulated

salaries of administrative officers, like the president or the
operations manager, who may perform functions related to
Earnings Tax
lending, financing or investing activities, though not directly
and exclusively. financing companies Financing companies are considered NBFIs. Hence,
not subject to IAET these are not subject to improperly accumulated earnings tax
However, with respect to interest expenses allowed as
(IAET) in view of the express provision that IAET shall not apply
deductions, all interest expenses incurred in relation to the
to banks and other NBFIs (Section 29, Tax Code).
above activities are allowed as deductions, notwithstanding the
fact that the same are incurred in generating interest income
subject to final taxes. Thus, leverage could be achieved in this
regard.
Gross receipts tax
If the financing company performs QB activities, its
MCIT liability is determined similar to that of banks (see
Chapter II, MCIT for banks and NBFIs performing QB Gross receipts tax (GRT) is imposed on the gross
functions). If it does not perform QB activities, its MCIT liability receipts of financing companies. The rate of GET. applicable
is determined in accordance with the rules discussed above that depends on the type of income and on the remaining maturities
are applicable to financial intermediaries not performing QB in the case of income from lending activities, as follows [Section
122, Tax Code; RR 09-04]:
activities.

The general rules on MCIT, as discussed in Chapter II 1. 5% on income from interest, commissions,
on MCIT of banks, apply to financing companies as well. discounts' and all other items treated as pees
income under the Tax Code

On interest, commissions and discounts from

lending activities as well as income from
Withholding Taxes
financial leasing, on the basis of the remaining
maturities of the instruments from which ouch
receipts are derived: (a) 5% if the maturity
Financing companies are also liable to withhold tax on
period is five years or less, and (b) 1% if the
their income payments to suppliers and service providers. In
maturity period is more than five years
the same manner, taxes may also be withheld on income they
receive from customers. The general rules on withholding tax
(both with respect to its withholding tax obligations and the
Taxable base
withholding required on its income), as discussed in Chapter
II, Banks, apply to financing companies.
The gross receipts of a financing company subject to
GRT are determined in accordance with generally accepted
accounting principles (GAAP) as maybe prescribed by the SEC,
238 Chapter IV Financing Companies 239
if the financing company is not performing QB functions, or by
the BSP, if performing QB functions, with respect to its QB
operations. (See discussion on GRT in Chapter II, Banks. The
same applies to financing companies.)
Pretermination
In the case of pretermination, or if the period of
maturity is shortened, the maturity period is reckoned to end
as of the date of pretermination for purposes of determining
the applicable tax rate. Any adjustment in tax due caused by
pretermination of existing agreements shall be reflected as a
separate item in the GRT return covering all transactions within
the month in which the pretermination took effect (Section 5,
RR 09-04). The same computation as that for banks applies to
financing companies. (See Tables 2.1 and 2.2 in Chapter II,
Banks.)
Financing companies with QB functions
7% GRT applies to non- Financing companies with QB functions are subject to
lending income of the same GRT rates applicable to banks (see discussion on GRT
financing companies in Chapter II, Banks). Hence, for financing companies with QB
with QB functions functions, a higher rate of 7% applies to income derived from
activities other than lending and finance leasing, compared to
the 5% rate applicable to the same income of financing
companies without QB functions. This higher rate was
introduced as an amendment under RA 9337.
Note that RA 9337, which increased the rate of GRT on
income from non-lending and non-finance lease activities to
7%, amended only Section 121 of the Tax Code, which refers to
taxation of banks and NBFIs performing QB functions. No
similar amendment was introduced in Section 122, which refers
to the GRT applicable to financing companies and other
financial intermediaries without QB functions.
Power of the BIR Commissioner to impose GRT
Under Section 122 of the Tax Code, the Commissioner
of the Bureau of Internal Revenue (BIR) may impose the same
GRT on persons performing similar financing activities. This
was the Commissioner's basis for imposing the GRT on
pawnshops, money changers and foreign exchange dealers.
(Refer to discussion on pawnshops and money changers in
Chapter VI, Other Financial Intermediaries.)
Documentary Stamp Tax
Some documents or contracts evidencing transactions
entered into by a financing company and its clients are subject
to documentary stamp tax (DST). The same DST on documents
and transactions entered into by banks applies to financing
companies. (See discussion on DST in Chapter II, Banks.)
Similar to banks and insurance companies, financing
companies are required to use the online electronic DST
imprinting machine and, with respect to the payment of DST,
are also regarded as statutory payors whenever they are a party
to a transaction subject to DST (RR o9-00, August 31, 2000).
(See also DST sections in Chapter II, Banks, and Chapter III,
Insurance Companies.)

240 Chapter IV
PREVALENT TYPES
OF FINANCING COMPANIES
There are at least two popular kinds of financing
companies in the Philippines: finance leasing companies and
credit card companies.
Finance Leasing Companies
Nature of business
There are two kinds of leases: a financial lease and an
operating lease.
financial lease Afinaneial lease is a mode of extending credit through
a non-cancellable lease contract under which the lessor (the
financing company) purchases or acquires, at the instance of
the lessee (the borrower), machinery, equipment, motor
vehicles, appliances, business and office machines, and other
movable and immovable property. As consideration, the lessee
makes periodic payments of a fixed amount of money sufficient
to amortize 7o% of the purchase price or acquisition cost of the
asset, including any incidental expenses and a margin of profit
over a certain period of time during which the lessee has the
right to hold and use the leased property.
lessee can claim rental The obligatory period during which the foregoing
as deductible expense payments are made shall not be less than two years (Section 3,
RA 8556). During the same period, the lessee has the right to
hold and use the leased property with the right to expense the
lease rentals paid to the lessor.
Ili
Financing Companies 241
The lessee bears the cost of• repairs, maintenance,
insurance and preservation. The lessee, however, is under no
obligation or option to purchase the leased property from the
owner-lessor at the end of the lease contract (Section 3, RA
8556 and RR 09-04).
A finance lease is a kind of lease that transfers
substantially all the risks and rewards incidental to ownership
of an asset to the lessee. Ownership of the title may or may not
eventually be transferred (RR 09-04).
A finance lease arrangement (also referred to as capital
leasing) enables the lessee to assume all ownership rights over
an asset although the lessee has no legal title thereon. This
arrangement is favorable to companies that are
undercapitalized, or are growing faster than their capital build-
up, or have no assets to support mortgage loans. But even in
the case of strongly capitalized and stable companies, there are
many instances when leasing may still be the better method of
acquiring assets, as in the case where the lessor is at the same
time the manufacturer of the asset. In this instance, the
financing cost of the lease may be less than the interest rate on
a bank loan, especially if the manufacturer is using finance
leasing to promote the sale of its asset or product (Saldafia,
1997).
operating lease An operating lease, on the other hand, is simply Mixed
3 in tax regulations as a lease other than finance lease of a finance
company (RR 09-04). Under an operating lease, the lessor
retains ownership of the asset. The lessee that uses the asset is
required to make periodic payments, known as a lease, to the
lessor. In an operating lease, the lessor maintains, insures and
services the leased property. All of these costs are built into the
lease payments.
An operating lease is attractive when a business is
confronted with an uncertain future. The lessee can also
terminate an operating lease whenever it sees that the
equipment is facing technological obsolescence (Saldafia,1997).
242 Chapter IV
Income tax
A finance leasing company is subject to the same rules
on income taxation (regular income tax, MCIT, IAET, final and
creditable withholding taxes) as other financing companies. Its
income from leasing, lending, discounting and investing is
governed by the same rules applicable to the income of
financing companies and is entitled to the same items of
deduction under Section 34 of the Tax Code.
Under a finance lease arrangement, expenses
connected with the maintenance, insurance and servicing of
the property being leased are allowable deductions from the
taxable income of the lessee, not of the lessor (finance leasing
company).
lessor can claim Since ownership over the property leased still belongs
depreciation as a to the lessor in a finance lease arrangement, the depreciation
deductible expense related to it can rightfully be claimed as a deductible expense
by the finance leasing company.
The depreciation period for properties under a finance
lease, however, should not be less than 6o% of the depreciable
life of the property as determined under RR 19-86.
Correspondingly, the lease payments by the lessee are allowed
as deductions from the lessee's taxable income.
DETERMINATION The amount of rental received by a lessor under a
OF INTEREST finance lease arrangement has two components: the principal
COMPONENT and the interest. The interest is computed using either the
annuity method or the sum-of-the-years-digits method of
accounting (RR 19-86, November 10, 1986).
In recording the interest, discount or lease income
derived from a finance lease, a financing company may shift
Financing Companies 243
from using the Rule of 78 method to the interest or annuity
method, in line with the Statement of Financial Accounting
Standards No. 19, Summary of GAAP for Banks and Financial
Intermediaries or Accounting for Leases, as adopted from
International Accounting Standards issued by the Accounting
Standards Council (BIR Ruling No. DA -595-o4, November 23,
2004).
Under Rule 78 (sum-of-months-digit method), the
earned portion of the interest collected in advance on discount
notes and loans and unearned lease income or unearned portion
of rentals on financial lease transactions is amortized over the
agreed term. The earned portion is recognized as income on a
monthly basis based on a computed factor. Under the interest
or annuity method, interest income is recognized based on the
outstanding principal balance of the loan or financial lease.
EXEMPTIONS RA 8556 ensures the elimination of any distortion in
GRANTED TO the choice of financing arrangement, thus making the business
LESSEES UNDER A of finance lease at par with simple loan or other modes of
FINANCE LEASE financing. This is intended to promote the growth of financing
and leasing companies considering their important role in
providing credit for investments in capital goods and
equipment.
presentation of Pursuant to Section 10 of RA 8556, any incentive,
incentives, exemptions exemption or benefit, including tax credits and investment
or benefits under a incentives granted by law or regulation to any purchaser,
finance lease importer, borrower or other eligible person in connection with
arrangement any purchase, importation, acquisition, or other transaction is
not lost, diminished or impaired when acquired through a
financial lease rather than through borrowing or other
conventional method of financing. In other words, any incentive
or exemption given to the lesee is not affected by the mode of
financing chosen. Financing companies that provide financial
leases in such cases are entitled to the incentive, exemption,
244 Chapter IV
benefit or privilege available to borrowers, importers,
purchasers or other eligible persons in such transactions under
the applicable law or regulations (Section 10, RA 8556).
Any tax exemption or incentive given to the lessee in a
finance lease is not lost, notwithstanding the fact that the
purchaser or importer on record of the equipment of capital
good is not the lessee but the financing company.
Section 11 of RA 8556 also provides a parity clause
whereby financing companies shall enjoy other rights, powers,
benefits and privileges as may be granted by the law to other
NBFIs when they provide medium- and long-term credit to
small and medium-scale enterprises.
Withholding tax
lease payments are not In general, a lease payment made by a lessee for the
rentals for purposes of continued use or possession of personal property used in
withholding tax business for which he has not taken title, or in which he has no
equity, is subject to a creditable withholding tax (CWT) of 5%
on the gross rental or lease. However, a lease payment under a
financial lease arrangementwith a leasing and finance company
authorized to operate under RA 8556 (Financing Act of 1998)
is exempt from the 5% CWT applicable to rentals of personal
property (RR 02-98).
Thus, while a payment made under a finance lease
arrangement may be claimed as a deductible expense from the
taxable income of the lessee, such payment is not subject to
the CWT imposed on rentals of property (RR 17-03, March 31,
2003). However, it may be subjected to the 1% CWT applicable
to purchases of goods if the lessee is a top ten thousand
corporation (TTC) designated by the BIR. Otherwise, the rental
payment is not subject to either the 5% or the 1% CWT (RMC
72-04, November 16, 2004).
Financing Companies 245
This tax treatment may stem from the real nature of
the payment that, under a finance lease arrangement, the
amounts paid by the lessee are not rentals for the use of
property, but are in fact an amortization for the purchase price
of the equipment or goods being leased.
Gross receipts tax
TAXABLE BASE Income derived from a finance leasing activity by a
finance leasing company registered under the Financing
Company Act (RA 5980, as amended by RA 8556) is subject to
the GRT applicable to financing companies in general (refer to
GRT discussion in this chapter).
In computing the taxable gross receipts from a finance
leasing arrangement that is subject to GRT, only the interact
income or the interest component of the lease pa.ytnern is
included. That portion of the rental or periodic payment that
pertains to the recovery of the principal or amortization for the
cost of the property being leased is not considered taxable gross
receipts subject to GRT. In contrast, payments made under an
operating lease arrangement are subject to GRT for the full
amount (RR o9-04).
expenses for the Amounts paid by the lessee for certain expenses, which
account of the lessor are properly for the account of the lessor, are deemed to have
been received by the lessor as part of its rental income, which
is subject to GRT. Previously, this was excluded from GRT
under RR 19-86. The new law (RA 9238, as implemented by
RR 09-04), however, impliedly removed this exclusion by
including a catch-all provision that imposes a GRT on
practically all items of income received by finance leasing
companies. The rate of GRT applicable to this type of income
may follow the rate that is applicable to the stipulated rental.
246 Chapter IV
TAX RATE The GRT rate applicable to the interest income received
by finance leasing companies varies depending on the
remaining maturity of the lease: 5% if the remaining lease
period is five years or less, or 1% if the remaining lease period
is more than five years.
RENTING OR If the lessor is a person other than a finance and leasing
LEASING BY company registered under the Financing Company Act, the
NON•FINANCE rental income derived from the lease arrangement is subject to
LEASING the 12% VAT and not to the GRT (RR 19-86). If the annual gross
COMPANIES IS receipts do not exceed P1.5 million, the rental income is subject
SUBJECT TO VAT, to a 3% percentage tax. The BIR, in its Ruling No. DA-533-o4,
NOT GRT dated October 25, 2004, confirmed that a company engaged in
the business of renting or leasing (excluding financial leases)
is considered an ordinary service company subject to VAT (12%
rate) on the basis of its gross receipts.
CHARACTERIZATION The specific terms and conditions in the document
OF THE LEASE evidencing the lease agreement determine the real nature of
the arrangement — whether a finance lease, an operating lease,
or a conditional sale. In other words, the substance of the
agreement, rather than the form used to evidence such
agreement between the lessor and the lessee, prevails (RR 09-
04).
In cases where the true nature of the transaction cannot
be determined with certainty from the terms and conditions of
the agreement, the BIR Commissioner will make the
determination on the basis of all relevant facts and
circumstances of each transaction. When in doubt, the parties
to the lease agreement may secure from the BIR an advance
ruling clarifying the nature of the transaction (RR 19-86).
Financing Companies 247
Documentary stamp tax
Financial lease arrangements are not specifically
identified under the law as subject to DST. However, being in
the nature of an obligation (rather than a lease of personal
property), it may be subject to the DST applicable to debt
instruments under Section 179 of the Tax Code of 1997.
RA 9243 (February 17, 2004), nevertheless, exempted
from the DST any assignment or transfer of mortgage or leases,
or the renewal or continuance of any contract, if there is no
change in the maturity date or remaining period of coverage.
Prior to this amendment, such assignments or transfers were
subject to the same DST imposed on the original document.
Credit Card Companies
Nature of business
A credit card company is a financing company [BIR
Ruling Nos. 151-90 (August 16, 199o) and UN-17o-95, April
19, 1995]. It engages in two distinct financing activities from
which it earns financing income: (1) interest income for
financing the cardholders' purchases; and (2) discount revenue
from discounting the receivables of the merchant
establishments from the cardholders.
The credit card business is a unique financing business.
It is a form of financing arrangement involving three parties--
the card company, the cardholder, and the merchants or service
establishments.

248 Chapter IV
Credit is extended through the issuance of credit cards
to qualified cardholders. Using this credit card, a cardholder
can purchase goods and services on credit with accredited
merchants. The credit line extended by a merchant to the
cardholder is settled by the card companyby way of discounting
or purchasing the receivables, without recourse, at a discount.
The difference between the face value of the receivable
discount revenue and
interest income and the price at which such receivables are purchased is an
income (a discount revenue) of the card company. Upon
purchase of the receivables, the card company steps into the
shoes of the merchant as a creditor of the cardholder that can
rightfully enforce collection from the cardholder. In instances
where the cardholder is unable to pay the amount owed on time,
a credit is extended by the card company by allowing the
cardholder to pay in installment, with interest. This is normally
termed as "revolving credit." The interest income received is a
financing income (an interest income) of the card company.
In addition to the discount revenue and interest income
earned from a credit card arrangement, other fees such as
penalties, annual fees and service charges may be earned.
In a card business, the card company may either be an
ISSUER VS.
ACQUIRER issuer or an acquirer, or both. Most card companies are both
acquirers and issuers.
As an issuer, the card company issues credit cards to
qualified cardholders. The credit card has a two-fold purpose:
first, it allows the cardholder to purchase, on credit, goods and
services from accredited merchants; second, it authorizes the
card company to collect from the cardholder the amount of
credit extended by the merchants.
An acquirer, on the other hand, acquires the credit
extended to the cardholder by the merchant by purchasing or
Financing Companies 249
discounting the receivables of the merchant. The purchase or
-
discounting of the receivable is done electronically through the
use of swiping machines linked to the system of the acquiring
card company.
An issuer earns financing income in the form of
interests when it extends credit to the cardholder by allowing
them to pay in installment (termed as a revolving credit), An
acquirer, on the other hand, earns discount revenue from
discounting or purchasing the receivables of the merchant. If
the issuer is not the same as the acquirer, which is normally
the case, the discount revenue is shared between the two. The
shared income is termed as interchange fee.
Most card companies are members of, and are Hated
to, international financing networks such as VISA, Mastercard,
Diners Club and American Express. Membership in these
international financing networks allows the card companies to
re-sell or re-discount the receivables purchased from the
merchant to these international companies, thereby reducing
the risk associated with financing. The resale or rediscounting
of the receivables is done electronically and almost
simultaneously upon acquiring or discounting the merchant's
receivables.
In the Philippines, only banks and financial institutions
are allowed to engage in credit card operations since receivables
financing (either by discounting or factoring) is governed by
the Financing Company Act of the Philippines. The BSP
exercises supervisory powers over card companies.
Taxes
The income of a card company is subject to taxes
(income tax, GRT, MCIT, and withholding taxes) as a financing
company. The interest income, discount revenue, and other fees
f
250 Chapter IV
earned from its operations are subject to the same taxes
imposed on financing companies in general.
WITHHOLDING Similar to banks and other financing companies,
TAXES income received from financing services (e.g., interest income
and fees), if paid by a TTC, is subject to a 2% CWT. Its payments
to customers, on the other hand, are also subject to the regular
rules on withholding. In addition, card companies are, as a
special rule, required to withhold 1/2 of 1% CWT on their gross
payments to merchants.
Payments to One half of the gross amounts paid by any credit card
merchants company to any business entity, whether natural or juridical
person, representing the sales of goods and services made by
the business entities (called "accredited merchants" in the card
business) to the cardholders, is subject to a 1% CWT (RR 02-
(98). Effectively, the rate is 1/2 of 1% and is based on the gross
amount paid to merchants. The amount withheld is to be
remitted by the card company to the BIR in accordance with
the withholding tax rules.
The basis of the withholding is the gross amount paid
to the merchants, which means the amount due the merchant
without any deduction. There is no clear pronouncement from
the BIR whether the "gross amount paid" refers to the face
amount of the receivables purchased from merchants, or
whether it refers to the purchase price of the receivables, which
is net of discount. The amount due or payable to the merchants
for the purchase of the latter's receivables is that amount net of
discount.
Withholding on Interest income and other service fees earned by card
interest income and companies from cardholders are not subject to any CWT, unless
discount revenue the cardholder is a BIR-designated TTC. If the cardholder is a
Financing Companies 251
TTC, it is required to subject the interest income and other
charges paid to the card company to a 2% CWT as payment for
the purchase of a financing service [RR 17-03 (March 31, 2003)
and BIR Ruling No. DA-1o4-o4 (March 8, 2004)].
The taxation of the discount revenue (which is a
financing income) earned from purchasing the receivables of
the merchants — whether or not subject to the 2% withholding
tax — may yet have to be clarified by the BIR. Although it is in
the nature of a financing income, the discount revenue arises
from the sale or purchase of an intangible asset (the receivable),
which is beyond the coverage of the withholding tax rules.
Considering that the income is earned as an incident
to the sale of an intangible property (receivables are intangible
assets), a transaction that is beyond the coverage of the
withholding tax regulations, it may not be subject to
withholding tax. The BIR, however, may equate its tax
treatment to that of the interest income received by financing
companies, since a discount is in the nature of a financing
income similar to interest.
The implementation of the withholding tax is another
issue that has yet to be resolved. Difficulties may be
encountered, considering that merchants, who in principle are
the payors of the income, do not have control over the payment
of the discount revenue.
GROSS RECEIPTS Like financing companies, card companies are subject
TAX to GRT on their gross receipts from interests, commissions,
discounts, service fees, membership fees and charges and all
other items constituting gross income under Section 32 of the
Tax Code (refer to earlier section on GRT of financing
companies).
252 Chapter IV
DOCUMENTARY Similarly, card companies are subject to DST on
STAMP TAX documents they issue and transactions they enter into that are
subject to DST as discussed in the DST section of this chapter.
However, the following transactions are exempt from DST
(Section 199, Tax Code, as amended by RA 9243):
1. All forebearances arising from sales or service
contracts, including credit card and trade
receivables, but the exemption is limited only
to those executed by the seller or service
provider itself
2. Assignment or transfer of any contract or any
evidence of obligation or indebtedness, if there
is no change in the maturity date or remaining
period of coverage
GOVERNMENT FINANCING
INSTITUTIONS
Home Development Mutual Fund
The Home Development Mutual Fund (HDMF) was
organized on June 11,1978 [Presidential Decree (PD) No. 1530]
for the purpose of providing financing to meet the housing
problems of government and private sector employees.
HDMF is subject to To help the HDMF carry out its mandate, PD 1530
regular taxes provided it with certain tax privileges. These were, however,
withdrawnby PD 1931 on Juneu, 1984, and by Executive Order
(BO) No. 93 on December 17, 1986. Thus, the HDMF is subject
to all taxes applicable to a financing company.
Financing Companies
The interest income earned and other fees collected and
received from extending loans in pursuit of its charter-
mandated activities are subject to the GRT imposed on
financing companies under Section 122 of the Tax Code (BIR
Ruling No. DA-665-o4, December 23, 2004).
HDMF as habitually The BIR ruled further that the HDMF/Pag-IBIG Fund,
engaged in real estate with respect to its sale of foreclosed assets to its members, is
business considered habitually engaged in the real estate business, The
acquired assets are ordinary assets of the HDMF and are subject
to withholding tax rates applicable to entities habitually
engaged in the real estate business, i.e., real estate dealers (BIR
Ruling No. DA-209-o2, November 15, 2002).
This ruling is not aligned with the treatment given to
banks with respect to the sale of foreclosed assets. While assets
foreclosed by banks are also considered ordinary assets, RR
02-98, as amended, specifically provides that for withholding
tax purposes, banks are not considered engaged in the real
estate business, regardless of the number of properties they
sell. Unlike the HDMF, banks are subject to the single rate of
6% CWT on the sale of foreclosed assets and not to the multi-
rated withholding tax imposed on real estate dealers
Since the HDMF is deemed a real estate dealer, its
income from the sale of the foreclosed assets is subject to the
regular income tax of 35% based on net income and not the 6%
capital gains tax. Also, it may be subject to the 12% VAT, and
not the 5% GRT.
Again, this ruling is not consistent with the treatment
accorded to the sale of foreclosed assets of banks. Although the
foreclosed assets of banks are considered ordinary assets
subject to the regular 35% income tax, banks are not considered
real estate dealers with respect to their sale of foreclosed sums.
The activity of selling the foreclosed assets is merely hankie:A*1
to their business as banking institutions. Hence, any income
from the sale of real and other property owned and acquired
(ROPOA) is still subject to GRT and not to VAT.
254 Chapter IV 255
CHAPTER
Home Guaranty Corporation
Pursuant to RA 8763 (March 7, 2000), the Home
Guaranty Corporation (HGC) took over the Home Insurance
and Guaranty Corporation for the purpose of promoting
homebuilding through a system of credit and mortgage
guarantees. The HGC guarantees the payment of mortgages,
loans and other credit facilities arising from financial contracts
exclusively for residential purposes. It also supervises and
regulates building and loan associations.
tax privileges under The HGC is granted certain tax privileges under its
HGC Charter Charter. Under Section 19 of its Charter, interests and yields
earned or accumulated on mortgage, debentures, bonds, notes,
mortgage and asset-backed securities, interests under lease and
other credit instruments, whether issued by the HGC or covered
by its guaranty in favor of natural and juridical persons, in cash
or in bonds, shall be exempt from all taxes to the extent of the
weighted average interest rate of 10.15%, as implemented by
Article 44 of its implementing regulations.
Discounts are in the nature of interest and are given
the same exemption as that of interest earned. Thus, discounts
earned from HGC zero-coupon bonds are exempt from income
tax to the extent of an average of10.15% interest rate. Any excess
is subject to income tax, either to the 20% FWT if it qualifies as
a deposit substitute, or to the regular income tax (BIR Ruling
No. 026-02, June 27, 2002).
The HGC, on its own, is authorized to increase the level
required for exemption in such varying amounts as shall be
reflective of the social concerns of the state. The exercise of
this authority is, however, subject to the approval of the
President of the Republic of the Philippines upon
recommendation of the Monetary Board of the BSP.
V Investment Houses
and
Investment Companies
INVESTMENT HOUSE
Definition
An investment house is defined as any enterprise that
is engaged in the underwriting of securities of other corpora-
tions, including securities of the Republic of the Philippines,
whether isolated or on a regular basis. It is authorized, among
others, to participate in a syndicate undertaking to purchase,
sell, distribute or arrange on a guaranteed basis the securities
of other corporations and of the Government of the Republic
of the Philippines..
It can likewise participate as a soliciting dealer or a sell-
ing group member in tender offers, block sales, or exchange
offerings or securities; it can deal in options, rights or warrants
relating to securities; and it has such other powers that a dealer
may exercise under the Securities Act.
An investment house may engage in the business of a
dealer or broker under the Securities Act without obtaining a
separate license for that purpose [Presidential Decree (PD) No.
129, otherwise known as the Investment Houses Law, Febru-
ary 15, 1973; Batas Pambansa Blg. 68, May 1, 1980; and Re-
public Act (RA) No. 8799, July 19, 2000].
256 Chapter V Investment Houses and Investment Companies 257
underwriting Underwriting, which is a principal business of
investment houses, is the act or process of guaranteeing the
distribution and sale of securities of any kind issued by another
corporation [Section 3(a), PD 129]. It is the act of purchasing
corporate bonds, commercial papers, and treasury securities
for the investment house's own account or for resale to investors
either directly or through dealers.
Underwriters make their income from the price
difference or underwriting spread between the price they pay
the issuer and what they collect from investors or from broker-
dealers who buy portions of the offering. Underwriting spreads
(normally expressed in points per unit) vary widely and are
influencedby the underwriter's expectations of market demand
for the securities offered for sale, or by the interest rates and
other factors (Fitch, 2000).
Under Philippine law, the underwriting of securities can
be undertaken only by investment houses duly licensed under
the law (PD 129) and by universal banks registered as an
underwriter of securities with the Securities and Exchange
Commission or SEC (Section 23, RA 8791, May 23, 2000; and
SEC Omnibus Rules and Regulations for Investment Houses
and Universal Banks Registered as Underwriters of Securities).
securities The term "securities" includes written evidence of
ownership, interest or participation in an enterprise, or written
evidence of indebtedness (PD 129). It includes shares of stock
in a corporation and rights to subscribe to, or receive, such
shares. It includes bonds, debentures, notes or certificates or
other evidence of indebtedness issued by any corporation,
including those issued by political subdivisions, with interest
coupons or in registered form [Section 22(T), Tax Code]. It
likewise includes derivatives like options or warrants,
certificates of assignments, participation, trust certificates or
similar instruments.
.
Classification
Investment houses fall under two sub-classifications:
(1) those with quasi-banking (QB) functions, and (a) those
without QB functions. Investment houses are under the
supervision of the SEC. Insofar as their QB activities are
concerned, these are under the regulation and supervision of
the Bangko Sentral ng Pilipinas (BSP).
Specific Regulatory Requirement4
PD 129 requires that the majority of the voting stock of
an investment house be owned by citizens of the Philippbms,
and that majority of the board members of such investment
house be citizens of the Philippines. However, with the issuance
of RA 8366 (October 21, 1997), which liberalized the investment
house industry in the Philippines, the citizenship restriction
was relaxed..
nationality requirement The new requirement is that at least 40% of the voting
stock of any investment house shall be owned by citizens of the
Philippines. Furthermore, foreign nationals may also sit as
members of the Board of Directors to the extent of their
participation in the equity of the investment house. it
capital requirement
RA 8366 also changed the minimum capital
requirement from P20 million under PD 129, to P3oo million.
In the case of existing investment houses, the new miniretun
paid-in capital was allowed to be built up in two years. They
were required to put up P200 million after the effectivity of RA
8366 and add at least P5o million every year thereafter until
the minimum capitalization is attained.
258 Chapter V
Taxes
Income tax and other taxes
Investment houses are subject to the following—income
tax, minimum corporate income tax (MCIT), gross receipts tax
(GRT), documentary stamp tax (DST), branch profits
remittance tax (BPRT) and withholding taxes—and are
governed by the same tax rules as those imposed on other
financial intermediaries.
If the investment house performs QB functions, the
taxation rules applicable to banks and other nonbank financial
intermediaries/institutions (NBFIs) with QB functions shall
apply. That is, for MCIT, it is Section (i) of Revenue
Memorandum Circular (RMC) No. 04-03 (January 15, 2003)
and for GRT, it is Section 121 of the Tax Code that applies. On
the other hand, if the investment house does not perform QB
functions, then the taxation rules applicable to financing
companies and other NBFIs without QB functions shall apply.
That is, for MCIT, it is Section (iii) of RMC 04-03, and for GRT
it is Section 122 of the Tax Code. (Please see related discussions
under Chapter II, Banks, and Chapter IV, Financing
Companies.)
Investment houses derive their income from a number
of sources. Being in the underwriting business, investment
houses earn an underwriting income, which is generally in the
form of underwriting spread. Investment houses also earn fees
or commissions, income from financial advisory services,
consultancy services, project finance, loan syndication,
brokering, investment management agreement, directional
placement, trust business, arrangement of mergers and
acquisitions, among others. These items of income constitute
taxable income that is subject to income tax at a rate of 35% on
net, that is, gross income less allowable deductions (Sections
27, 28 and 34, Tax Code).
Investment Houses and Investment Companies 259
GAINS ON TRADING In BIR Ruling No. DA-144-01 (August 3o, 2001), the
OR REDEMPTION OF Bureau of Internal Revenue (BIR) held that the exemption from
LONG-TERM
income tax of gains from the sale, exchange, or retirement of
COMMERCIAL
bonds, debentures or other certificates of indebtedness with a
PAPERS
maturity of more than five years applies as well to long-term
commercial papers with maturity of more than five years. The
exemption pertains only to gains arising from sale, exchange,
or retirement and not to interest income.
The ruling clarified that the exemption provision under
Section 32(g) of the Tax Code is broad enough to cover all long-
term instruments with maturity of more than five years and
does not discriminate as to who the issuer is and to whom the
long-term instrument is issued. Long-term instruments, such
as commercial papers, are covered by the exemption. (See also
discussion on long-term instruments in Chapter II, Banks.)
INTEREST INCOME ON The tax exemption granted to individuals on interest
DEBT INSTRUMENTS income from long-term bank deposits applies only to
instruments issued by banks. Since investment houses are not
banks and are under the regulatory supervision of the SEC, the
interest income on debt instruments (such as the long-term
capital market debt instruments) does not qualify for the
income tax exemption granted to bank deposits, deposit
substitutes, or investment instruments issued by banks (BIR
Ruling No. DA-144-01, August 3o, 2001). (See also discussion
on exemption of interest income in Chapter II, Banks.)
Improperly accumulated earnings tax
As NBFIs, investment houses are exempt from
improperly accumulated earnings tax (IAET). The Tax Code
provision is clear that all financial intermediaries are exempt
from IAET.
260 Chapter V
Gross receipts tax
GRT RATE The gross receipts from interests, commissions and
discounts, and all other items treated as gross income under
Section 32(A) of the Tax Code (e.g., underwriting fees, service
fees or consultancy fees) are subject to GRT at applicable rates
under Section 121 or 122 of the Tax Code.
For investment houses performing QB functions, the
applicable provision of the Tax Code is Section 121, and the
GRT rate applicable to non-lending income is 7% (as amended
by RA 9337), while those without QB functions are subject to a
5% GRT imposed under Section 122 of the same Code.
Interests, commissions or discounts received from
lending activities are subject to a GRT rate of 5% if the
remaining maturity of the instruments is five years or less.
Otherwise, it is 1%. As regards income from lending activities,
the same rate of 5% or 1% applies whether or not the investment
house has QB functions. See also discussion on lending
activities under Chapter II, Banks.
The increase in the GRT rate (from 5% to 7%) on non-
lending income was introduced by RA 9337 (effective
November 1, 2005). The increased rate of 7% applies only to
financial intermediaries that are covered by Section 121 of the
Tax Code referring to banks and other NBFIs performing QB
functions. It does not apply to financial intermediaries covered
under Section 122 of the Tax Code referring to financing
companies and all other NBFIs (such as investment houses)
not performing QB functions. In effect, this amendment
increasing the GRT rate to 7% favored NBFIs without QB
functions by 2% points compared to their counterparts with
QB functions as regards GRT on non-lending income.
Investment Houses and Investment Companies 261
t GRT BASE GRT is based on taxable gross receipts. For investment
houses without QB functions, the taxable gross receipts are
determined in accordance with generally accepted accounting
principles (GAAP) prescribed by the SEC. On the other hand,
for investment houses performing QB functions, the taxable
gross receipts are determined in accordance with GAAP as
prescribed by the BSP. Additionally, it is required that financial
statements on which the taxable gross receipts shall be based
are to be prepared in accordance with GAAP as may be
prescribed by the SEC or the BSP, whichever is applicable (RA
9238 (February 5, 2004) and RR 09-04 (June 21, 2004)].
RA 9238, as worded, and as implemented by Revenue
Regulations (RR) No. 09-04, is not clear whether GRT will still
be based on actual collection or receipts (which was the rule
prior to its amendment), or will now be based on accrued
income. (See discussion on GRT in Chapter II, Banks.)
Documentary stamp tax
The same DST is imposed on transactions entered into
or documents issued by investment houses as those issued by
banks. (See DST discussion in Chapter II, Banks.)
For the business of investment houses, however, the
more prevalent transactions and documents issued by them
are subject to DST at the rates listed in Table 5.1.
TRADING OF The amendments introduced by RA 9243 on the DST
SHARES OF STOCK liability of primary issuance and secondary trading of shares
of stock are significant. RA 9243 reduced by half the DST rate
on the original issuance of shares of stock—from P2 to Pa on
each P200, or fractional part thereof, of the par value of such
stock. It likewise reduced by half the DST rate on secondary
issuance of shares of stock (i.e., sales, agreements to sell,
memoranda of sales, deliveries or transfer of shares or
262 Chapter V
Table 5.1
Type of Document DST
Original issue of shares of stock P1 on each P200, or fractional part thereof, of the par value of
such shares of stock or, in the case of shares of stock without
par value, it is based on the actual consideration for the
issuance of such shares of stock. In the case of stock
dividends, it is based on the actual value represented by each
share (Section 174, Tax Code).
Sales, agreements to sell, P175 on each P200, or fractional part thereof, of the par value
memoranda of sales, deliveries or of such shares of stock. In case of stock w ithout par value, the
transfers of shares or certificates DST shall be equivalent to 25% of the DST paid on the original
of stock issue of said stock, provided that only one tax shall be collected
on each sale or transfer of stock from one person to another,
regardless of whether or not a certificate of stock is issued,
endorsed, or delivered in connection with such sale or transfer
(Section 175, Tax Code).
certificates of stock)—from P1.50 to Po.75 on each P200, or
fractional part thereof, of the par value of such stock.
exempt transactions In addition, it exempts from the scope of the DST the
and documents following transactions:
1. The sale, barter or exchange of shares of stock
listed and traded through the local stock
exchange for a period of five years from its
effectivity, or until March 20, 2009
2. The borrowing and lending of securities
executed under the Securities Borrowing and
Lending Program of a registered exchange, or
in accordance with regulations prescribed by
the appropriate regulatory agency, such as the
SEC.
To be exempt, the borrowing or lending of
securities agreement covered by the exemption
should be duly covered by a master securities
Investment Houses and Investment Companies 263
borrowing and lending agreement acceptable
to the appropriate regulatory authority and duly
registered and approved by the BIR.
3. The trading of fixed income and other securities
in the secondary market or through an
exchange
These amendments are in recognition of the importance
of the securities market as an emerging component for capital
development.
CASH•SETTLED In the case of a cash-settled securities swap transaction
SECURITIES SWAP (CSST) arrangement entered into between financial
TRANSACTION institutions, and between financial institutions and the BSP,
to simultaneously buy or sell government securities spot and
sell or buy comparable securities, at a pre-determined future
date and price with the same counter-party, RMC 62-03
provides that such transaction is not subject to DST.
Comparable securities for this purpose refer to any
government securities having more or less the following
features: (i) same credit risk, (2) similar cash flow and/or
similar settlement price, and (3) similar maturity and tenor
rate within the range of acceptable deviation of plus or minus
seven days for T-bills, and plus or minus one month for fixed
rate treasury notes (FXTNs) from the maturity date of the
original security.
In so ruling, the BIR held that a CSST is not a deposit
substitute whose main feature is borrowing. Without
borrowing, there is no deposit substitute. Since the CSST is not
a deposit substitute and is not under any other class of
documents subject to DST, then the provisions of DST do not
apply. Conveyance of securities in the secondary market is also
not subject to DST (RR 13-04, December 23, 2004).
272 Chapter V
Taxes
Income tax, MCIT and other taxes
Securities brokers and dealers are subject to taxes--
income tax, MCIT, IAET and value-added tax (VAT)--in the
same manner as other entities engaged in business as a seller
of service. Income generated from activities as securities broker
or dealer is subject to the 35% regular income tax based on net .
income. The MCIT (with computation of the taxable base
similar to a seller of service) may likewise be due if the tax due
using the regular income tax computation is lower than the
MCIT. The income received, as well as the income payments
that brokers and dealers make to suppliers, is governed by the
same rules on withholding applicable to ordinary sellers of
services.
For purposes of deduction from taxable gross income,
however, a deduction is allowed for dealers in securities as
regards losses sustained from wash sales of stocks or securities
wash sale (Section 38, Tax Code). Wash sale refers to the sale or other
disposition of shares of stock or securities where it appears that
within a period beginning 3o days before the date of such sale
or disposition and ending 3o days after such date, the dealer
has acquired (by purchase or by exchange upon which the entire
amount of gain or loss was recognized by law), or has entered
into a contract or option to acquire, substantially identical stock
or securities.
Improperly accumulated earnings tax
Since securities brokers and dealers are not financial
intermediaries, they are subject to the io% IAET if organized
as corporations.
Investment Houses and Investment Companies 273
Value-added tax
Since a dealer in securities is considered a plain seller
of service and not a financial intermediary, it is covered under
the VAT system. Its total gross receipts (determined in
accordance with the rules applicable to a seller of service) are
subject to 12% VAT.
Stockbrokers are likewise subject to VAT beginning
January 1, 2003. Prior to being subject to VAT, stockbrokers
were excluded from the coverage of VAT twice. First, by RA
8761 (February 15, woo), which deferred VAT liability to
January 1, 2001, and second, by RA 9010 (February 27, mu),
which deferred it to January 1, 2003. During the period under
deferment, securities brokers and dealers were subjected to a
7% tax based on their gross receipts (January 1, 2001 to
December 31, 2002).
TAX BASE In determining the gross receipts subject to VAT from
sales of shares of stocks by dealers in securities, RMC 13-96
(January 15, 1996). laid down the rules as follows:
1. For sale of securities listed and traded in the
local stock exchange, the base shall be the gross
income derived from the sale or exchange of the
listed and traded securities.
Gross income refers to total gross selling price
less total acquisition cost of securities sold for
the month or quarter plus any incidental
income.
For sale of securities done over-the-counter, the
base shall be the gross income indicated in the
VAT invoice.
 274 Chapter V Investment Houses and Investment Companies 275
Sales, barters or exchanges of shares of stocks, whether
listed and traded through the local stock exchange or not, are
subject to VAT only if the seller is a dealer in securities.
Otherwise, they are exempt from VAT (RMC 13-96).
For stockbrokers, VAT is based on gross receipts from
brokers' fees and other service fees.
IPOs NOT SUBJECT The initial public offering (IPO) of shares of stocks is not
- TO VAT subject to VAT, but it is subject to the percentage taxes of 4%, 2%
and i% depending on the proportion of the shares of stocks sold,
bartered or exchanged to the total outstanding shares of stocks
after the listing in the stock exchange (RMC 13-96).
Documentary stamp tax
TAX RATE AND BASE
A dealer in securities is subject to the same DST outlined
earlier (under the DST section of this chapter) with respect to
its own transactions or taxable documents issued by it.
A stockbroker, being merely an arranger for the sales
and purchases of stocks to be made, is not liable to the DST on
documents and transactions entered into by its principals.
However, a stockbroker who effectedthe sale of shares of stocks
subject to SIT, or in the case of secondary trading of shares of
stocks subject to IPO tax, is required to collect the SIT or the
IPO due on the transaction and remit the same to the BlRwithin
five banking days from the date of collection, and to submit
every Monday to the secretary of the stock exchange, of which
he is a member, a true and complete return that shall contain a
declaration of all the transactions effected through him during
the preceding week and of taxes collected by him as turned over
to the BIR [Sections 127(C)(1) and (2), Tax Code].
Sale of shares of stocks by a person other than a
dealer in securities
The sale and exchange of shares of stocks by a person
other than a dealer in securities is subject to either the CGT,
the SIT or the IPO tax. The CGT is imposed as a final income
tax on the gain derived from the sale or disposition of the shares
of stocks. The STT and the IPO tax are likewise in the nature of
a final income tax on the gain presumed to have been realized
from the sale of shares of stocks. Consequently, any gain derived
from the sale or disposition of shares of stocks on which the
CGT, the STT and the IPO have already been paid shall no
longer be subject to the individual or corporate income tax
imposed on the seller [Section 127(D), Tax Code].
Capital gains tax
A final tax is imposed on the net capital gains realized
during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except
on shares sold or disposed of through the stock exchange, at
the rates of 5% on the net gain not over Pioo,000, and 10% on
amounts in excess thereof.
This shall apply whether the seller is an individual or a
corporation [Sections 24(C); 25(A)(3) and 27(D)(2), 28(A)(7)(c)
and (B)(5)(c), Tax Code]. However, in the case of a nonresident
alien individual not engaged in business, the tax imposed shall
be a final tax of 25%. In cases where the investor-income
recipient is a resident of a tax treaty country and is not engaged
in business in the Philippines, the rates under the treaty shall
apply.
276 Chapter V
EXEMPTION OF CGT Shares of stock in a domestic corporation sold by
UNDER TAX nonresidents maybe exempt from tax under existing tax treaties
TREATIES with other countries. In several cases, the BIR ruled that in the
case of residents (individual or corporate) of countries with
which the Philippines has an existing tax treaty (e.g., a foreign
corporation residing in the U.S.), the gains arising from the
sale of shares of stock in a domestic corporation are exempt
from Philippine tax except where the property of the domestic
corporation whose shares are the subject of sale consists
principally of immovable property located in the Philippines
(i.e., more than 50% of the entire assets in terms of value). In
this case, the Philippines may tax the gains derived from the
disposition of the shares of stock. This exemption may apply to
residents of the U.S., Japan, Malaysia, Singapore and Sweden
among others [BIR Ruling Nos. 007-96, January 18, 1996 (RP-
Japan Tax Treaty); 037-96, March 7, 1996 (RP-Malaysia Tax
Treaty); 261-89, December 15, 1989 (RP-Singapore Tax Treaty);
002-93, January 13, 1993 (RP-Sweden Tax Treaty); 135 -94,
September 1, 1994 (RP-U.S. Tax Treaty)].
The exemption not only includes CGT on the sale of
shares of stock not listed and traded in the stock exchange, but
it also covers STT imposed on the sale, barter or exchange of
shares of stock listed and traded through the local stock
exchange. This applies even after STT was reclassified from Title
II (Tax on Income) to Title V of the Tax Code (Other Percentage
Taxes) by RA 7717 (May 5, 1994).
The reclassification of STT from an income tax to a
percentage tax did not remove the said tax from the coverage
of the provisions of tax treaties entered into by the Philippines
with other countries for the reason that existing tax treaties do
not distinguish the manner in which the stocks are sold, whether
traded in local stock exchange or not, as long as the tax is
imposed on the gain, or the presumed gain, derived from the
sale of the shares of stock (BIR Ruling No. 139-98, September
28, 1998).
Investment Houses and Investment Companies 277
RETURNS AND The CGT return shall be filed and the tax due shall be
PAYMENT paid within 3o days after each transaction. A final consolidated
return of all transactions during the taxable year should herded
on or before the 15th day of the fourth month following the close
of the taxable year as an attachment to the annual individual
or corporate income tax return [Section 52(D), Tax Code].
Stock transaction tax
TAX RATE AND BASE An STT at the rate of half of 1% is due on every sale,
barter, exchange or disposition of shares of stock listed and
traded through the local stock exchange by a person other than
a dealer in securities. The tax is paid by the seller qr transferor
based on the gross selling price or the gross value in money of
shares or stocks sold, bartered, exchanged or otherwise
disposed of [Section 127(A), Tax Code].
RETURNS AND The stockbroker who effected the sale subject to 9RT is
PAYMENT required to collect the tax and remit the same to the BIR within
five banking days from the date of collection thereof, and to
submit every Monday to the secretary of the stock exchangt, of
which he is a member, a true and complete return that shall
contain a declaration of all the transactions effected through
K.
him during the preceding week and of taxes collected by him
as turned over to the BIR [Section 127(C)(1), Tax Code].
L
Initial public offering tax
TAX RATE AND BASE Every sale, barter, exchange or disposition through IPO
of shares of stock in closely held corporations is subject to tax
based on the gross selling price or gross value in money of the
shares of stock sold, bartered, exchanged or otherwise disposed
278 Chapter V
of in accordance with the proportion of shares of stock sold,
bartered, exchanged or otherwise disposed of to the total
outstanding shares of stock after the listing in the local stock
exchange at the following rates: (a) 4% if proportion is 25% or
less; (b) 2% if 25% up to 33 1/3%; and (c) 1% if over 33 1/3%
[Section 127(B), Tax Code].
The IPO tax is to be paid by the issuing corporation in
primary offering or by the seller in secondary offering.
CLOSELY HELD Section 127 of the Tax Code lays down the guidelines in
CORPORATIONS the determination of a closely held corporation for purposes of
the IPO tax.
A closely held corporation means any corporation
where at least 5o% in value of the outstanding capital stock, or
at least 50% of the total combined voting power of all classes of
stock entitled to vote, is owned directly or indirectly by or for
not more than 20 individuals.
rules on ownership In determiningthe stock ownership, the following rules
shall apply:
1. Stock not owned by individuals Stock owned
— the BIR within five banking days from the date of collection
directly or indirectly by or for a corporation,
partnership, estate or trust shall be, considered
owned proportionately by its shareholders,
partners or beneficiaries.
2. Family and partnership ownerships An — registered in the books of the corporation unless the receipts
individual shall be considered the owner of the
stock owned, directly or indirectly, by or for his
family, or by or for his partner. Family includes
only his siblings (whether whole or half-blood),
spouse, ancestors and lineal descendants.
Investment Houses and Investment Companies 279
3. Option If any person has an option to acquire
—
stock, such stock shall be considered owned by
such persons. An opportunity to acquire such
an option and each one of a series of options
shall be considered an option to acquire such
stock.
4. Constructive ownership as actual ownership
— Stock constructively owned by reason of the
application of paragraph (1) or (3) above shall,
for purposes of applying paragraph (1) or (2),
be treated as actually owned by such person;
but stock constructively owned by the
indiVidual by reason of the application of
paragraph (2) shall not be treated as owned by
him for purposes of again applying such
paragraph in order to make another individual
the constructive owner of such stock.
RETURNS AND In the case of primary offering, the corporate issuer
PAYMENT shall file the return and pay the corresponding tax within 30
days from the date of listing of the shares of stock in the local
stock exchange. In the case of secondary offering, the broker
who effected the sale shall collect the tax and remit the same to
thereof [Section 127(C)(2), Tax Code].
EFFECT OF The transfer of ownership over the shares sold or
NONPAYMENT OF TAX exchanged from the seller to the buyer is not allowed to be
of payment of the CGT, STT or IPO is filed with, and recorded
by, the stock transfer agent or by the corporation.
280 Chapter V Investment Houses and Investment Companies 281

THE PHILIPPINE STOCK EXCHANGE However, if the seller is a nonresident foreign

The Philippine Stock Exchange (PSE) is the organized
market for buying and selling securities such as stocks,
warrants, bonds, options and others in the Philippines. The PSE
started as a mutual organization owned by its members until it
was demutualized and became a stock organization in zoo1 with
its shares now listed on the stock exchange.
corporation, the gains realized by said corporation from its
alienation or transfer of its membership seat in the PSE are
business profits that may not be subject to Philippine tax under
existing tax treaties, like in the case of the RP-Malaysia Tax
Treaty (BIR Ruling No. 099-97, August 9, 1997).
PSE as Statutory Pavor of DST

One has to buy PSE shares of stock to become part

owner of the PSE and/or to obtain trading rights (previously
called membership seat) that will allow one to become a trading
participant or member of the PSE.
A PSE member or trading participant can execute
buying and selling transactions in the stock exchange. An
investor must hire the services of a broker-trading participant
to buy and sell stocks and other securities listed and traded in
the stock exchange.
Sale of Membership Seat
in the PSE
The PSE is the designated statutory payor of DST in
the case of shares of stock and other securities traded in the
local stock exchange. Thus, it shall be responsible for the
remittance of the DST due to the BIR regardless of who bears
the burden of paying the tax in the case of shares of stock traded
in the local stock exchange. Even if the PSE is exempt from
DST, it shall remit the tax as a collecting agent in the same
manner as if it were its own payment. If it fails to collect and
remit the tax from the taxable party, it shall be treated
personally liable for the tax, in addition to the penalties (interest
and surcharges) that may be imposed for failure to pay the tax
on time [Sections 3(c)(4)(c) and (d), RR 09-00 (August 31,
200o)].

A membership seat in the PSE is considered a capital

asset within the purview of Section 39(A)(1) of the Tax Code. A
seat being sold is a privilege akin to a franchise to transact
business as a stockbroker at the stock exchange. With the
membership seat come certain privileges and rights enjoyed
by the member. These rights and privileges are intangible
assets. Thus, the gains realized from the sale of a membership
seat is part of the seller's gross income subject to the regular
income tax of 35% based on net income (BIR Ruling Nos. 151-
98, October 19, 1998, and 349-87, November 5, 1987).
 283
Chapter V
282
CHAPTER

Other Financial Intermediaries

In addition to banks, insurance companies, pre-need

companies, financing companies and investment banks, there
are still a number of financial institutions that play a significant
role in the Philippine financial system. These are referred to as
nonbank financial institutions/intermediaries (NBFIs).
These other financial intermediaries include
pawnshops, venture capital corporations, and money changers
or foreign exchange dealers. Similar to other financial
intermediaries like banks, insurance and financing companies,
these are also designated as statutory payors of documentary
stamp tax (DST) and are likewise required to use the online
electronic DST imprinting machine. (See related discussions
in Chapters II, III, IV and V.)

Nature of Business

Pawnshops play an i'mportant role in the mobilization

and disposition of available financial resources in the country,
especially with respect to the financing requirements of low-
income earners or those residing in the countryside.
pawnshop defined A pawnshop is generally defined as a person or entity
engaged in the business of lending money on personal property
284 Chapter VI
delivered as security for loans. The term "pawnshop" is
synonymous to, and may be used interchangeably with,
pawnbroker or pawn brokerage [Section 3, Presidential Decree
(PD) No. 114, otherwise known as the Pawnshop Regulation
Act, January 29, 1973].
For many years, pawnshops have been associated with
lending investors. The definition of a lending investor is quite
broad as to encompass all types of fund or money lenders. The
term "lending investor" includes all persons who make a
practice of lending money for themselves or others at interest
[Section 4.108-3(g), RR 16-05, September 1, 2005]. In fact, for
tax purposes, pawnshops had been regarded as being in the
same category as lending investors (RMO 15-91, March 11,1991;
RMC 43-91, May 2, 1991; Michel J. Lhuillier Pawnshop, Inc. v.
Commissioner of Internal Revenue, 2000; Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 2001;
and Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshop, Inc., 2003).
However, in Commissioner oflnternalRevenue v. Michel
J. Lhuillier Pawnshop, Inc. (2003), the Supreme Court (SC) ruled
that pawnshops are not to be treated as lending investors. While
both pawnshops and lending investors may be in the business of
lending money, the manner by which they conduct business
differs. Lending investors usually lend without collateral but
charge a higher interest rate than banks. On the other hand,
pawnshops generally lend on personal property (usually in the
form of jewelry) as security for their loans.
Income Tax and Other Taxes
A pawnshop is subject to the same taxes—income tax,
minimum corporate income tax (MCIT), DST, and withholding
taxes—as other NBFIs. Its income is taxed at the regular 35%
Other Financial Intermediaries 385
rate based on net income if the pawnshop is organized as a
corporation, or at the rate of 5% to 32% if it is a sole
proprietorship. If corporate, it is likewise subject to WIT
similar to other NBFIs such as financing companies and
investment banks. The income of a pawnshop is generally in
the form of interest on loans extended to borrowers and on
gains derived from the sale of the asset pledged as security for
the loan.
The i.o% improperly accumulated earnings tax (IAET)
does not apply to pawnshops in view of Revenue Regulations
(RR) No.10-04 (October 18, 2004), which classifies pawnshops
as NBFIs.
Gross Receipts Tax
While it may be argued that pawnshops are a
component of the overall financial system of the Philippines,
their operation, for taxation purposes, has not been well
understood. There has been a long battle regarding the correct
business tax applicable to them—whether they are subject to
the 5% lending investors tax, or to the 12% value-added tax
(VAT), or whether they are exempt from any business tax.
It was only recently that the SC ruled (Commissioner
of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,
2003) on the exact nature of pawnshop operations and stated
that, for tax purposes, pawnshops are not lending investors.
Prior to this, Revenue Memorandum Circular (RMC) Nos. 43-
91 (May 2, 1991) and 47-92 (October 15, 1992) provided that
pawnshops are to be considered lending investors and are
subject to the same business tax applicable to lending investors.
However, while the SC ruled that pawnshops are not
liable to tax as lending investors, it did not mention the tax to
286 Chapter VI Other Financial Intermediaries 287
which pawnshops are liable. It did not mention if pawnshops
would be liable to VAT as seller of services or to the gross
receipts tax (GRT) applicable to NBFIs.
In the absence of clear guidelines from the SC, the
Bureau of Internal Revenue (BIR) maintained that pawnshops
are subject to the 12% VAT based on the broad provision of the
VAT law that all sellers of services, unless specifically exempted,
are subject to VAT. Thus, the BIR continued to assess
pawnshops for VAT. This position of the BIR has been
strengthened by court rulings upholding the liability of
pawnshops to VAT (Cebu Mabuhay Pawnshop, Inc. v.
Commissioner of Internal Revenue, 2004; Cebu Mabuhay
Pawnshop, Inc. v. Commissioner of Internal Revenue, 2005;
Commissioner of Internal Revenue v. Antam Pawnshop
Corporation, 2005; and Commissioner of Internal Revenue
v. Michel J. Lhuillier Pawnshop, Inc., 2004).
pawnshops are subject However, in October 18, 2004, the BIR changed its
to GRT as NBFIs position and issued RR 10-04 stating that pawnshops are
considered NBFIs subject to the GRT at the rate of 5% or 1%,
depending on the maturity of the instrument in the case of
income from lending, or 5% for non-lending [Section 122, Tax
Code, and Republic Act (RA) No. 9238].
The classification of pawnshops as financial
intermediaries is based on Section 2.3 of RR 09-04 (June 21,
2004), which defined "financial intermediary" to include any
person whose principal function is lending. (PD 114 creating
pawnshops defines it to be a person or entity engaged in the
business of lending money.) This decision is likewise supported
by the Bangko Sentral ng Pilipinas (BSP), which classified
pawnshops as NBFIs within its supervision.
In view of this reclassification of pawnshops, the BIR
justified its imposition of the GRT under Section 122 of the
Tax Code. The move is based on the authority granted to the
Commissioner of the BIR to impose the GRT on persons
performing similar financing activities, particularly on those
falling within the definition of "nonbank financial
intermediaries" as defined under RR 09-04 (implementing
guidelines of RA 9238, the new GRT law). This position of the
BIR was again reiterated under RR 16-05, which states that
pawnshops are exempt from VAT but subject to GRT as NBFIs
under Section 122 of the Tax Code.
In view of all these developments, commencing January
1, 2005, pawnshops became liable to the GRT as NBFIs under
Section 122 of the Tax Code.
Documentary Stamp Tax
A pawnshop ticket, which evidences the pawnbroker's
receipt for a pawn, is subject to DST under Section 195 of the
Tax Code. Although it is not a security or a printed evidence of
indebtedness, a pawnshop ticket is the logical document
evidencing a pledge contract (Commissioner of Internal
Revenue v. Antam Pawnshop Corporation, 2005; this case is
pending appeal with the SC).
DST applicable to Section 195 of the Tax Code imposes a DST on every
pawnshop ticket mortgage or pledge of property, real or personal, where the same
shall be made as a security for the payment of a definite sum of
money, at the rate of P20 if the amount secured does not exceed
P5,000, and additional Pio on each P5,000, or fractional part
thereof, in excess of P5,000. The pledge of property, which is
executed as a security by a person obtaining a loan from a
pawnshop for the payment of such loan, is subject to DST.
In cases where the pledge/mortgage is made as a
security for the payment of a fluctuating account or future
advances without fixed limit, the DST on the pledge/mortgage
is computed on the amount actually loaned or given at the time
288 Chapter VI FinancialIntermediaries
of execution of the pledge/mortgage. If subsequent advances
are made, the additional DST to be paid is computed on the
basis of the amount advanced or loaned at the rates earlier
indicated. If the actual amount of loan or credit granted under
the pledge/mortgage is specified, the DST is paid and computed
on the full amount of the loan or credit granted (Section 195,
Tax Code).
VENTURE CAPITAL CORPORATIONS
Nature of Business
A venture capital corporation is an entity organized
jointly by private banks, the National Development
Corporation, and the Technology Livelihood and Resource
Center and/or other authorized government agencies whose
primary purpose is to develop, promote and assist, through debt
or equity financing or any other means, any small- and medium-
scale enterprise in the country (Section X379, BSP Manual of
Regulations for Banks). Pursuant to PD 1688 (April 3,1980), a
bankwith prior BSP approval may invest in equities of a venture
capital corporation organized to assist small- and medium-scale
enterprises as one of its financial allied undertakings (Section
X377, BSP Manual of Regulations for Banks).
Taxes
The results of the business operations of the venture
capital company shall be taxed in the same manner as other
NBFIs (refer to Chapter V).
Intermediaes 289
MONEY CHANGERS
OR
FOREIGN EXCHANGE DEALERS
A money changer or foreign exchange dealer is a person
or entity regularly engaged in the business of buying and/or
selling foreign currencies. The term "money changer" is used
interchangeably with the term "foreign exchange dealer" (BSP
Circular No. 471, Series of 2005).
A remittance agent that offers to remit, transfer or
transmit money on behalf of any person to another person and/
or entity is not a money changer or foreign exchange dealer
(BSP Circular No. 471, Series of 2005).
Taxes
A money changer or foreign exchange dealer is liable
to pay income tax at the rate of 5% to 32% if it operates as a
single proprietorship, or 35% if it is organized as a corporation.
Under RA 9337, money changers are considered NBFIs
that are exempt from VAT but subject to GRT under Section
122 of the Tax Code (Section 4.109-1, RR 16-05). Thus, gross
receipts from commissions, fees, net gains from foreign
currency trading and other items of income under Section 132 sl
of the Tax Code are subject to a 5% GRT. Previously, money
changers were treated like dealers in securities that are subject
to VAT based on their gross income (BIR Ruling No. 076-95,
April 19, 1995).
290 Chapter VI Other Financial Intermediaries 291
HOLDING COMPANIES
Nature of Business
Holding companies are generally referred to as
companies that own the majority of stock or securities of one
or more other corporations usually for purposes of control
rather than investment. If this is the only purpose, the company
is said to be a pure holding company. A holding company may
also carry on a business of its own and is thus referred to as a
mixed holding company or a holding-operating company
(Mogan & Gardner, 1973).
The provision on the taxation of a holding company,
more specifically that of a personal holding company, which
used to be in the Tax Code, was deleted. The old Tax Code
defined a personal holding company usingtwo criteria: (1) gross
income requirement — at least So% of a corporation's gross
income is personal holding company income; and (2) stock
ownership requirement — at any time during the last half of
the taxable year, more than 50% in value of a corporation's
outstanding stock is owned, directly or indirectly, by, or for,
not more than five individuals.
The term personal holding company excluded from its
scope corporations exempt from income tax, banks, life insurance
companies or foreign personal holding companies. Under the old
law, a personal holding company was subject to a tax based on the
undistributed net income of the personal holding company. This
tax was in addition to the regular income tax. The tax (which was
referred to then as a "surtax") was intended to discourage the
formation of personal holding companies.
In effect, therefore, the surtax imposed on personal
holding companies has been replaced by the IAET, which is a
10% tax based on the improperly accumulated taxable income
of corporations [Section 29(A), Tax Code].
A holding company or an investment company is prima
facie evidence of a purpose to avoid the tax on the shareholders
or members of a corporation, thus subject to IAET. Pursuant
to RR 02-01 (February 12, 2001), which implements the IAET
provisions of the Tax Code, a holding company is a corporation
that has practically no activities except holding property and
collecting the income from it or investing the same.
Tax Treatment
As stated under RR 02-01, the activity of a holding
company consists merely of holding property and collecting the
income from it or investing the same. Thus, its tax liabilities
are limited to income derived from the property it holds and
from its investments. These items of income are active income
of the holding company since its principal activity is to hold
property and collect and invest the income from such property.
Dividends received by a holding company from a domestic
corporation are not subject to tax since these are in the nature
of intercorporate dividends.
With regard to business tax liability, the holding
company is liable to VAT on rental/lease payments,
management fees and other income received on the property it
holds. If the holding company also acts as a financial
intermediary, such as a financing company, its income is subject
to GRT imposed on that financial intermediary.
292 Chapter VI
CHAPTER
LENDING INVESTORS
Nature of Business
The term lending investor includes all persons who make
a practice of lending money for themselves or others at interest. It
includes all persons, other than banks, NBFIs, finance companies
and other financial intermediaries not performing quasi-banking
functions, who make a practice of lending money for themselves
or others at interest [RMC 13-96 (January 15, 1996) and Section
4.108-3(g), RR 16-05, September 1, 20 051
Lending investors are under the supervision of the
Securities and Exchange Commission (SEC).
Taxes
The income of lending investors from their lending
activity, as well as other income received incidental to their
business, is subject to the regular 35% income tax (and MCIT,
JAET, if corporations) and applicable withholding taxes.
Lending investors are not classified as financial
intermediaries for tax purposes. They are, therefore, not subject
to GRT but are subject to VAT as sellers of services. A lending
investor is subject to 12% VAT based on gross income consisting
of interests, fees, charges and incidental income derived from
the lending of money (RMC 13-96).
293
VII Local Taxes
TAX RATE
Banks and other financial institutions are subject to
business tax imposed at the local government level. The rate
authorized to be imposed by municipalities is a maximum of
5o% of 1%. On the other hand, cities, as well as municipalities
in Metro Manila, are empowered to collect as much as 50%
higher than the maximum rates for municipalities or 75% of
1% [Sections 143(f) and 151, Republic Act (RA) No. 7160, The
Local Government Code of 1991).
Not all local government units (LGUs) impose the
maximum rates allowed in the Local Government Code (LGC). In
Makati City, where most banking institutions are located, the rate
of tax is 20% of 1%. In Quezon City, banks are subject to a higher
rate of 25% of 1%, while other financial institutions are taxed at
6o% of 1%. The maximum rate is imposed in the City of Manila.
COVERAGE
For purposes of the imposition of the local business tax
(LBT), the entities covered by the term "banks and other
financial institutions" are specifically defined under the LGC
and its implementing regulations. Although similar to the Tax
Code, the coverage of the LGC is broader in scope as it includes
fl
294 Chapter VII
those regularly engaged in the business of lending funds even
if obtaining funds from the public is only done occasionally.
Banks and other financial institutions include nonbank
financial intermediaries/institutions (NBFIs), lending
investors, finance and investment companies, pawnshops,
money shops, insurance companies, stock markets, stock
brokers and dealers in securities and foreign exchange [Section
131(e), RA 7160].
[Note that for purposes of imposing the gross receipts
tax (GRT) under the Tax Code, lending investors and dealers
in securities are not NBFIs but are considered plain sellers of
services.]
Banks and Banking Institutions
Banks include commercial banks, thrift banks (savings
and mortgage banks, stock savings and loan associations,
private development bank), rural banks and government banks
such as the Development Bank of the Philippines (DBP) and
Land Bank of the Philippines (LBP).
Banking institutions, on the other hand, refer to entities
regularly engaged in the lending of funds or purchasing of
receivables or other obligations with funds obtained from the
public through the issuance, endorsement or acceptance of debt
instrument of any kind for their own account, or through the
issuance of certificates of assignments or similar instruments
with recourse, trust certificates or of repurchase agreements,
whether any of these means of obtaining funds from the public
is done on a regular basis or only occasionally. It likewise
includes those entities that regularly engage in the lending of
funds but receive deposits only occasionally. Trust entities,
building and loans associations (BLAs), and nonstock savings
Local Taxes 295
and loans associations (NSSLAs) are banking institutions [Local
Finance Circular (LFC) 1-93, June 16,1993)]•
For purposes of LBT, the terms "banks" and "banking
institutions" are synonymous and can be used interchangeably.
Insurance Companies
Insurance companies refer to those formed or
organized to save any person or corporation from loss, damage
or liability arising from any unknown, future, or contingent
event, or to indemnifyor compensate any person or corporation
for any such loss, damage or liability, or to guarantee the
performance of, or compliance with, contractual obligations or
the payment of debts of others.
For LBT purposes, the term "insurance companies"
includes all individuals, partnerships, associations,
corporations, and government-owned or -controlled
corporations or entities engaged as principals in the insurance
business (including their branches), except mutual benefit
associations and purely cooperative insurance associations
organized under the laws on cooperatives. It includes
professional reinsurers and government-owned and
government-controlled insurance corporations (LFC 02-93,
June 16, 1993); life and non-life insurance companies covering
insurance policies on individual or group life; industrial life;
health, accident and disability insurance; marine, fire and
casualty; as well as contracts of suretyship and bonding.
pre-need companies Pre-need companies that sell educational, health and
are contractors memorial services plans are not insurance companies but are
considered contractors. Hence, income earned and collected
from the sale of pre-need plans is not subject to the LBT
applicable to insurance companies but rather to the LBT
applicable to contractors.
296 Chapter VII
HMOs are insurance Health care insurance companies (such as health
companies maintenance organizations or HMOs), however, are subject to
LBT as insurance companies [Bureau of Local Government
Finance (BLGF) Opinion dated September 11, 2003].
Financing Companies
Financing companies are corporations or partnerships-
-except those regulated by the Bangko Sentral ng Filipinas
(BSP), the Insurance Commission (IC) and the Cooperative
Development Authority (CDA)--that are organized primarily
for the purpose of extending credit facilities to consumers and
to industrial, commercial or agricultural enterprises, either by
discounting and factoring commercial papers or accounts
receivables, or by buying and selling contracts, leases, chattel
mortgages or other evidences of indebtedness, or by leasing of
motor vehicles, heavy equipment and industrial machinery,
business and office machines and equipment, appliances and
other movable property (LFC 03-93, June 16, 1993).
TAX BASE
The LBT is based on gross receipts derived from the
preceding year. The items of income constituting the gross
receipts of banks and other banking institutions, insurance
companies and financing companies are enumerated in detail
under LFC 01-93, 02-93 and 03-93, respectively, all issued June
16, 1993 (see discussion below).
Local Taxes 297
Activities that are inherent, related, necessary or
incidental to the business of banking, insurance or financing
are treated as one business activity that is subject to the same
rate of tax imposed on the main business. The LBT is computed
on the combined gross receipts of all financing activities. Thus,
a separate Mayor's permit is not required for each banking,
financing or insurance activity.
Banks and Banking Institutions
The taxable gross receipts of banks and banking
institutions include the following (LFC 01-93):
1. Interest from loans and discounts, including
discounts earned and actually collected in
advance on bills discounted, demand loans,
time loans and mortgage contract receivables
2 Interest earned and actually collected on
interbank loans
3. Rental of property representing the earned
portion of the income collected in advance from
lessees of safe deposit boxes, and income
earned and actually collected from lessees on
bank premises and equipment
4. Income earned and actually collected from
acquired assets
5. Income from sale or exchange of assets and
property
6. Cash dividends earned and received on equity
investments
7. Bank commissions from lending activities
8. Income component from rentals from financial
leasing
All income and receipts not included in the preceding
enumeration are excluded from the taxing authority of the LGU.
298 Chapter VII
This includes the following: (1) interest earned under the
foreign currency deposit system, (2) interest accumulated by
lending institutions on mortgages insured under RA 58o
(September 15, 195o), as amended, otherwise known as the
Financing Company Act, and (3) receipts from filing fees and
service and administrative charges (LFC 1-93).
GRT vs. LBT
The determination of the taxable gross receipts of banks
subject to gross receipts tax (GRT) under the Tax Code differs
from that of the taxable gross receipts subject to LBT under
the LGC in that the Tax Code has a "catch-all provision" that
effectively captures all receipts of income of the bank and
subjects them to GRT. In contrast, under the LBT, only those
items of receipts specifically enumerated under the
implementing LFC are subject to LBT. All other receipts of
income not specifically included are deemed to be excluded
and are, therefore, not subject to LBT.
Insurance Companies
LFC o2-93 prescribes the guidelines for the
determination of the taxable gross receipts of insurance
companies. The gross receipts of insurance companies subject
to LBT include the following:
1. Insurance premiums actually collected, except
the following:
a. Premiums collected before the effectivity of
the ordinance enacted by the city or
municipality imposing the tax
b. 2% of all premiums for the sake of fire,
earthquake, and explosions hazard
Local Taxes 299
insurance pursuant to Presidential Decree
(PD) No. 1185 (August 26, 1977), otherwise
known as the Fire Code of the Philippines
c. Premiums refunded within six months after
payment of account
d Reinsurance premiums by a company that
has already paid the tax
e. Premiums collected or received by any
branch of a domestic corporation, firm, or
association doing business outside the
Philippines on account of any life insurance
of the insured, who is a nonresident
f. Premiums collected or received on account
of any reinsurance, if the risk insured
against covers property located outside the
Philippines, or if the insured, in the case of
personal insurance, resides outside the
foreign country where the original
insurance was issued or perfected
g. Portions of the premiums collected or
received by insurance companies
pertaining to variable contracts
h. The excess of the amounts necessary to
insure the lives of variable contract owners
2. Interest earnings on loans and discounts
actually collected
3. Rentals actually collected from property owned
by insurance companies
4. Income actually collected from acquired assets
5. Cash dividends received on equity investments
Similar to the LBT taxation of banks, all other income
and receipts not included in the preceding enumeration are
not subject to LBT. In the case of the specific exemptions under
(1), it is required that these items of receipts be recorded and
declared separately in the books of accounts for the exemptions
to apply.
300 Chapter VII
Premium tax vs. LBT
The basis of LBT for insurance companies is the same
as the basis for premium tax under the Tax Code: both are based
on gross receipts and almost the same items of deductions are
allowed.
Unlike in LBT, however, the interest earnings on loans,
discounts and other income from investments, which are
incidental income to an insurance company, are not subject to
premium tax. Also, incomes from rentals of property and from
other activities undertaken by insurance companies separate
from their insurance business are subject to VAT, and not the
premium tax. In the case of LBT, all income received by an
insurance company, irrespective of the nature of the income,
is subject to the same tax rate that is applicable to insurance
companies.
Financing Companies
For financing companies, the basis of gross receipts is
the same as that for banks and banking institutions (see LFC
03-93). The gross receipts of the Philippine Stock Exchange
(PSE), however, are not among the taxable income enumerated
under Section 143(f) of the LGC as subject to LBT.
Local Taxes 301
SITUS OF TAXATION
Banks
The situs of the LBT in the case of banking institutions
and financing companies is provided in LFC 01-93 and o3-93.
For banks, banking institutions and financing companies, all
gross receipts derived from transactions with the head office,
except those recorded in the branches, are taxable in the city
or municipality where the head office is located.
On the other hand, all gross receipts derived from
transactions filed and recorded with the branch are taxable in
the city or municipality where the branch is located. These
transactions negotiated with and approved by the branch
manager under his own authority, and those filed and
negotiated in the branch even if beyond the approving authority
of the branch manager (such as those forwarded to the head
office for approval), are taxable to the branch.
Insurance Companies
For insurance companies, insurance contracts or
policies recorded in the head office or branch that issued such
contracts or policies, and premiums received from such
contracts or policies, are taxable in the city or municipality
where the head office or branch is located. This rule applies
whether or not the insurance contracts or policies are solicited
or negotiated by insurance agents or brokers who are not
residents of the city or municipality where the branch is located.
1
Likewise, it does not matter whether the insurance
agent or broker is affiliated with, or assigned to, the branch.
All insurance premiums or receipts not recorded in the
302 Chapter VII
303

CHAPTER
branches in accordance with the rules mentioned are to be
recorded in the head office and are taxable in the city or
VIII Filing and Payment
municipality where the head office is located.

head office vs. branch For purposes of LBT, a head office is defined as the
principal office of the insurance company appearing in its
Articles of Incorporation, or as shown in the documents
submitted to the BSP, the Securities and Exchange Commission
(SEC) or the city or municipality.
A branch, on the other hand, refers to a fixed place in a
locality established as a branch as authorized by the BSP, the
SEC, or the IC. Regional or extension offices are not considered
branches but are extensions of the head office. Likewise, the
offices of an insurance agent or broker are not considered
branches of the insurance company.
Financial institutions are required to file their tax
returns on the due dates prescribed by law and regulations.
Below is a matrix of taxes required to be filed, along with their
corresponding due dates. The tax returns are to be filed
manually or through the eFiling and Payment System (eFPS).
For eFPS filers, the monthly withholding and VAT
returns are filed on a staggered basis. For this purpose,
taxpayers are categorized into five industry groups. Financial
institutions fall under Group A.

See Matrix of Tax Returns on succeeding pages.

FILING AND PAYMENT

The taxable period for LBT is the calendar year. The

tax accrues on the first day of January but may be paid in full
or in quarterly installments. The full payment or the first
quarterly installment for LBT is payable within the first 20 days
of January, while the succeeding installments are due within
the first 20 days of each subsequent quarter, unless otherwise
fixed in a corresponding local tax ordinance. Late payments
may be subject to a 25% surcharge and interest not exceeding
2% per month, but not to exceed 36 months.

LGUs are empowered to examine the books of accounts

and other records of entities subject to LBT once in every taxable
period. The district offices of the Bureau of Internal Revenue
(BIR) are mandated to make their records available to the local
treasury offices upon request for this purpose.
304 Chapter VIII Filing and Payment 305

Income Tax
Matrix of Tax Returns to be Filed

Income Tax Form Description Due Date Legal Basis

1701 Annual income tax returns April 15 of the succeeding NIRC, Section 51(C); RR 05-
Form Description Due Date Legal Basis
for self-employed year (w hether manual filing 04; RR 02-06
. individuals, and estates and or through the eFPS)
1702 Annual income tax return for The 15th day of the fourth National Internal Revenue
trusts
corporations and month follow ing the close of Code (NIRC), Section 77 (8);
partnerships the taxable year (w hether RR 09-01; RR 02-06
1701Q Quarterly income tax returns First qtr. - April 15 NIRC, Sections 74(A) and
manual filing or through the
for self-employed (B); RR 05-04 ; RR 02-06
eFPS)
individuals, estates and
trusts
NIRC, Section 77(B); RR 09- Second qtr. - August 15
1702Q Quarterly income tax returns Within 60 days after the
for corporations and close of each quarter 01; RR 02-06
partnerships (w hether manual filing or
through the eFPS)
Third qtr. - November 15
1702-AIF Account hformation Form The 15th day of the fourth NIRC, Sections 232(A) and (w hether manual filing or
for corporations and month follow ing the close of 77(8) through the eFPS)
partnerships in general the taxable year (This
requirement is currently 1701-AIF Account hformation Form April 15 of the succeeding NIRC, Sections 232(A) and
suspended) for self-employed year. 51(C)
individuals, including estates
and trusts (engaged in trade
or business)

Improperly Accumulated Earnings Tax (IAEf )

Form Description Due Date Legal Bas is

1704 JAB" One year and 15 days after RR 02-01; RR 05.04

the close of the taxable year
(w Nether manual filing or
through the eFPS)
 306 Chapter VIII
1
Final Withholding Tax Returns
Form Description
1601-F Monthly remittance returns of
final income taxes withheld
Filing of return and remittance
of tax for non-eFPS:
(a) For January to November
(b) For the December return:
Filing of return for eFPS:
(a) For the January to
December returns:
Remittance of tax for eFPS:
(a) For the January to
November returns:
(b) For the December return:
Filing and Payment 307
Final Withholding Tax Returns
Due Date Legal Basis Form Description Due Date Legal Basis
RR 02-98, as 1602 Monthly remittance return of Non-eFPS — ten days RR 02-98, as
amended by RR final income taxes withheld on after the end of each amended by RR 06-
06-01; RR 04-02; interest paid on deposits, and month 01; RR 04-02; RR 05-
RR 5-04; RR 02- yield on deposit substitutes 04
06 Filing of return and remittance
of tax for non-eFPS:
(a) For January to November: Ten days after the end of
each month
Ten days after the end of (b) For the December return: On or before January 15
each month of the following year
On or before January 15 .
of the following year Filing of return for eFPS:
(a) For the January to Group A — 15th day after
December returns: the end of each month
Group A — 15 th day after
the end of each month
Remittance of tax for eFPS:
(a) For the January to Every 15th day after the
November returns: end of each month
Every 15 th day after the
end of each month
(b) For the December return On or before January 20
of the following year
On -or before January 20
of the following year
308 Chapter VIII , Filing and Payment 309
Creditable Withholding Tax Returns
Form Description
1601-E Monthly remittance returns
of creditable income taxes
w ithheld (expanded)
Fling of return and
remittance of tax for non-
eFPS:
(a) For January to
November:
(b) For the December
return:
Filing of return for eFFS:
(a) For the January to
December returns:
Remittance of tax for eFPS
(a) For the January to
November returns:
(b) For the December
return:
1604-E Annual information return of
creditable income taxes
(expanded) / income
payments exempt from
w ithholding tax
Due Date
Non-eFPS — ten days after
the end of each month
Ten days after the end of
each month
On or before January 15 of
the follow ing year
Group A —15th day after the
end of each month
Every 15th day after the end
of each month
On or before January 20 of
the follow ing year
On or before March 1 of the
follow ing year w hen
payments w ere made
Withholding VAT
Legal Basis
PR 02-98 as amended by PR
06-01; RR 04 -02; RR 26-02;
RR 02-06
Withholding Tax Returns on Compensation
NIRC, Section 58 (0), RR 02-
98
1604-CF
Form Description Due Date Legal Basis
1600 Monthly remittance return of Ten days after end of month NRC, Section 114(C): WO-
VAT and other percentage (w hether manual filing or 98, as last amended by RR
taxes withheld through the eFFS) 04-02; RR 08-02; RR 0246
Form Description Due Date Legal Basis
1601-C Monthly remittance return of hion-eFFS— ten days after RRd2-98, as amended by
income taxes withheld on the end of each rronth RR 06-01; RR 04 -02; FR26-
compensation 02
Filing of return and
remittance of tax for non-
eFPS:
(a) For January to Ten days after the end of
November each moth
(b) For the December On or before January 15 of
return: the following year
Filing of return for eFPS
(a) For January to Group A —15th day after the
December returns: end of each month
Remittance of tax for eFPS
(a) For January to Every 151" day after the end
November returns: of each month
(b) For December return: On or before January 20 of
the follow ing year
Annual information return of On or before January 31 of NIRC, Section 58 (C); Pk*
income taxes withheld on the following year when 98
compensation and final payments were made
withholding taxes
310 Chapter VIII Filing and Payment 311

Fringe Benefits Tax Percentage Tax

Form Description Due Date Le gal Bas is Form Description Due Date Legal Basis

2551M Monthly percentage tax NIRC Section 114(A); RR 04-

1603 Quarterly remittance return eFPS —15 days after end of NIRC, Section 58(A); RR 03-
return on GRT or premium 02; RR 26-02; RR 02-06
of final income taxes each quarter 98, as last amended by RR
tax, except percentage
withheld on fringe benefits 04-02
taxes under Sections 120
paid to employees other than
(Overseas Dispatch), 125
rank and file
(Amusement Tax), 126
(Winnings), and 127 (IPO
Non-eFPS — ten days after and STT)
end of each quarter
Filing of return and payment 20 days after end of month
of tax for non-eFPS

VAT Returns Filing of return and payment Group A — 25th day of the
of tax for non-eFPS follow ing month

Due Date Legal Basis 2552 Fl rcentage tax return for For tax on sale of shares of NIRC Section 127 (C); RR 05-
Form Description
transactions involving stock listed and traded 04
shares of stock listed and through the LSE- within five
2550M Monthly VAT declaration NIRC Section 114(A); RR 04-
traded through the local banking days from date of
02; RR 26-02
stock exchange (LSE) or collection
through initial and/or
Filing of return and 20 days after end of the
secondary public offering
remittance of tax for non- month
(Section 127, STT and PO)
eFPS For shares of stocks sold or
exchanged through IFO -
Filing of return and payment Group A — 25th day of the w ithin 30 days from date of
of tax for eFPS follow ing month listing of shares of stock in
the LSE
2550Q Quarterly VAT Return 25th day follow ing the close NIRC, Section 114 (A); RR 02•
of each taxable quarter 06 For tax on shares of stock
(w hether manual filing or sold or exchanged through
through the eFPS) secondary public offering -
w ithin five banking days
from date of collection.

This return may also be filed

through eFPS.
314 Chapter VIII
VENUE FOR FILING AND PAYMENT
The above returns are to be filed manually or, in the
case of those required to be filed electronically through the eFPS
of the Bureau of Internal Revenue (BIR), with any accredited
agent bank (AAB) within the jurisdiction of the revenue district
office (RDO) where the financial institution is registered.
Manual filers may file their returns directly with the RDO if
there is no tax that has to be paid.
eFiling and Payment System
The BIR developed the eFPS to allow taxpayers to file
and pay their taxes electronically via the Internet. All financial
institutions that are considered large taxpayers and those
belonging to the top ten thousand corporations (TTCs) are
required to avail of the eFPS in the filing of tax returns and the
payment of taxes due thereon. Non-large taxpayers may either
file manually or use the eFPS.
Currently, there are 27 forms of tax returns that can be
filed using the eFPS. Except for tax returns with filing deadlines
fixed by law, the deadline for e-filing of tax returns under the
eFPS is five days later than the deadlines for tax returns filed
manually [Revenue Regulations (RR) No. 09-01 (August 3,
2001), as last amended by RR 05-04, (April 26, 2004)1
stockbrokers to file at Stockbrokers, regardless of the place of registration, are
RDO where the PSE is required to remit the stock transactions tax (STT) or initial
located public offering (IPO) tax due on the transactions or sales
Filing and Payment 315
SPECIAL RULES ON
FILING AND PAYMENT
Insurance Companies
insurance companies to Pursuant to a Memorandum of Agreement (MOA)
file at LBP, U.N. Avenue issued and signed in 1998 between the BIR and the Insurance
Branch Commission (IC), insurance companies are required to file their
returns and pay their taxes (such as income tax, premium tax,
DST, VAT, and withholding taxes and income tax) at the Land
Bank of the Philippines (LBP), U.N. Avenue Branch, which is
the IC-designated bank that accepts all tax payments of
insurance companies. This rule holds even if insurance
companies are now required to enroll in the eFPS and file most
of their returns electronically. Their e-payments are still
coursed through the IC-designated bank.
However, taxes related to the sale of real properties, such
as capital gains tax (CGT), documentary stamp tax (DST) and the
required creditable withholding tax, are still required to be paid
to the AAB within the jurisdiction of the RDO where the property
to be transferred is located or, in the absencethereof, to the revenue
collection officer of the revenue district office (RDO) having
jurisdiction over the location of the property [Revenue
Memorandum Circular (RMC) 50-03, August 22, 2003)].
Stockbrokers
316 Chapter VIII
effected by them as brokers with the AAB of the RDO having
jurisdiction over the place where the Philippine Stock Exchange
(PSE) is located. Similarly, the corporate issuer in primary
offering shall file and remit the IPO tax due with an AAB at the
RDO where the PSE is located (RR 05-95, September 29,1995,
and RR 05-04, April 26, 2004).
Separate Filing of Returns for FCDUs
A bank that is authorizedto transact in foreign currency
under the expandedforeign currency deposit system is required
to secure a separate taxpayer identification number (TIN) for
the foreign currency deposit unit (FCDU) or expanded FCDU
(EFCDU), and to file its own FCDU/EFCDU tax return. These
returns are filed separately from the regular banking unit (RBU)
operations of the bank. In addition, banks with FCDU/EFCDU
operations are requiredto maintain separate books and records
for their FCDU/EFCDU operations (RMC 14-02, April 10,
2002).
Special Rules on Filing and Paving
DST and Percentage Taxes
See sections on DST in Chapters II, III, and IV.
See also the section on DST in Chapter V with respect
to payment of DST, STI' and IPO tax by securities brokers and
dealers.
317
CHA-P-TER
IX Regulation and Supervision
Given the broad spectrum of institutions that make up
the Philippine financial system and the heterogeneous nature
of the products or services offered by such institutions, the
structure of the system that supervises and regulates them is
relatively fragmented.
There are three major government agencies that
regulate the operations of financial institutions in the
Philippines• namely, the Bangko Sentral ng Filipinas (BSP),
the Securities and Exchange Commission (SEC), and the
Insurance Commission (IC).
The BSP supervises the banking industry; the SEC
regulates the securities market institutions, products and
intermediaries; and the IC oversees the insurance sector. Bath
agency issues its own implementing regulations and
interpretative orders, providing guidelines on how the
institutions under each are to be supervised.
Banks and nonbank financial institutions/
intermediaries (NBFIs), in particular, have to be supervised
and regulated due to the very sensitive and ramified nature of
their activities and operations. These institutions hold their
customers' or investors' funds and subsequently lend out the
same to other persons or entities. This service, which is
financial intermediation specifically referred to as intermediation, requires a high level
requires a high level of of trust and efficiency, without which the entire business of
trust banking or quasi-banking (QB) would be a futile undertaking.
In general, banks and NBFIs that are engaged in QB
activities are supervised and regulated by the BSP. However,
318 Chapter IX
certain types of banks are supervised and regulated by other
government agencies as well.
For instance, cooperative banks, being in the nature of a
cooperative, are also supervised and regulated by the Cooperative
Development Authority (CDA). The extent of supervision and
regulation exercised by the CDA over cooperative banks are
specified under Republic Act (RA) No. 6938. Government-owned
or -controlled banks such as the Land Bank of the Philippines
(LBP) and the Development Bank of the Philippines (DBP) are
attached to the Department of Finance (DOF) for supervision
purposes. Banks are also under the supervision and regulation of
the Philippine Deposit Insurance Corporation (PDIC) with respect
to the safety of the money put in their trust by their clients. More
specifically, the PDIC provides insurance coverage for the money
deposited by bank clients.
Currently, there is a proposal being considered to set up a
banking commission (composed of the BSP, the PDIC, the SEC,
bankers and lawmakers, among others) that will map out the
directions and thrusts of the banking sector for the next ten years.
Insurance companies, on the other hand, are supervised
and regulated by the IC. Government-owned insurance
companies, such as the Government Service Insurance System
(GSIS) and the Social Security System (SSS), are also under
the supervision of the DOF.
Pre-need companies are supervised and regulated by the
SEC. There is, however, a standing proposal to transfer pre-need
companies to the IC for supervision and regulation purposes. On
the other hand, health maintenance organizations (HMOs) are
under the Department of Health (DOH).
NBFIs without QB functions, such as financing
companies, are under the supervision of the SEC, while those
with QB functions are supervised by the BSP with respect to
their QB operations.
Regulation and Supervision 319
In addition to supervision and regulation by
government agencies, banks and NBFIs, to the extent of their
membership in chambers or associations pertaining to their
activities or operations, are also required to abide by self-
regulatory policies imposed by such chambers or associations.
BANGKO SENTRAL NG PILIPINAS
Pursuant to RA 265 (the Central Bank Act, June 15,
1948), the BSP was first organized in 1948, as the Central Bank
of the Philippines, as a regulatory body for the entire financial
system of the Philippines. It underwent a major restructuring
in 1993 pursuant to RA 7653 (June 14, 1993), and was changed
into the BSP.
The creation of the BSP is based on the country's need
to set up a central monetary authority that will function and
operate as an independent and accountable entity on matters
relating to money, banking and credit. It is tasked to serve as a
catalyst to institutionalize a globally competitive financial
system that is conducive to the balanced and sustainable growth
of the economy.
supervision and The BSP exercises supervision over all banks, including
jurisdiction universal and commercial banks (private banks, government
banks and branches of foreign banks), thrift banks, rural and
cooperative banks and other NBFIs performing QB functions. It
also exercises supervision over NBFIs without QB functions but
with trust or investment management account (IMA) license and
that are subsidiaries or affiliates of banks and quasi-banks.
In addition, pawnshops, nonstock savings and loan
associations (NSSLAs), foreign exchange dealers, and venture
320 Chapter IX
capital corporations are all under the supervision of the BSP
pursuant to the laws governing them. (See Table 9.1 at the end
of this chapter.)
To enhance the BSP in carrying out its mandate, RA
7653 granted it with certain tax privileges, including: (1)
exemption from all national and local taxes for a period of five
years from the approval of RA 7653, or until June 14, 1998;
and (2) exemption from taxes and duties on importation and
exportation of notes and coins, gold and equipment for its
operations (Sections 125 and 126, RA. 7653).
Since its exemption from all taxes as embodied in RA
7653 already lapsed in 1998, it is now subject to all national
internal revenue taxes on its income, receipts, properties, and
other taxable transactions, except for the taxes and duties on
qualified importation and exportation. (See, for instance, VAT
Ruling No. o62-ol, September 21, 2001, which reiterated the
BSP's liability to VAT during the period April 1999 to March
2000.)
Presently, there are proposals to restore the BSP's tax
privileges in order to relieve it of substantial tax burden and
give it more flexibility in using its resources. These tax privileges
would also grant the BSP greater autonomy in exercising its
function of supervising and regulating the operations of
financial institutions in the country.
SECURITIES AND EXCHANGE
COMMISSION
The SEC is principally mandated to implement the
provisions of RA 8799 (otherwise known as the Securities
Regulation and Supervision 321
Regulation Code, July 19, 2000) in order to ensure the growth
and development of the capital market in the Philippines The
formulation of the revised Securities Regulations Code is
intendedto strengthen the safety nets for investors in securities
by ensuring full and fair disclosure of information about
securities and by minimizing, if not eliminating, insider trading
and other fraudulent or manipulative devices and practices that
create distortions in the market.
supervision and In 2004, the SEC accredited a total of 113,904 market
jurisdiction participants consisting of securities brokers and dealers,
financing companies, government securities eligible dealers,
investment companies, investment houses, issuers of exempt
and registered securities, pre-need companies and agents,
transfer agents, securities underwriters, and other market
participants (i.e., credit rating agencies, external auditors and
pre-need actuaries).
It likewise approved the registration of the Philippine
Dealing and Exchange Corporation (P D Ex) as a fixed income
exchange, and the application of the DBP for the registration
and licensing of its marketplace for small and medium
enterprises (SME) receivables purchases as an alternative
trading system (Securities and Exchange Commission Annual
Report, 2004).
INSURANCE COMMISSION
The IC is responsible for supervising and regulating the
insurance industry [Presidential Decree (PD) No. 1460, June
11, 1978)1
322 Chapter IX Regulation and Supervision 323
supervision and The administrative requirements imposed by the IC on
jurisdiction insurance companies include: (1) prior authority from the IC
to operate, (2) submission of financial condition and affairs,
(3) deposit of good securities (which shall be returned to the
insurance company once it ceases to do insurance business in
the Philippines), (4) legal reserves, (5) margin of solvency, (6)
rules on investments, and (7) retention limit.
Prior approval of the IC is required for all forms of
insurance policies and riders. Insurance companies are likewise
required to submit to the IC, on a periodic basis, statements
and reports concerning the condition of their affairs, including
their resources and liabilities (Section 223, PD 1460). Foreign
insurance companies are also required to appoint resident
agents as a condition precedent to their transaction of insurance
business in the Philippines (Sections 184 to 187 and Sections
215 and 226, PD 1460).
REGULATORY ISSUES
ON CERTAIN INDUSTRIES
Dual Supervision
universal banks Universal banks, because of their expanded functions
that allow them to engage in, or undertake, securities-related
functions (e.g., underwriting, which was primarily the turf of
investment houses), are under the dual regulation of the BSP
and the SEC. That is, banking operations and prudential
regulations fall under the BSP, while securities-relatedbusiness
is supervised by the SEC.
The separate supervision by the SEC of the securities
business of a universal bank effectively segregates the securities
business from the commercial banking business by appropriate
"Chinese wall" procedures that are put in place to ensure their
continuing effectiveness, thereby preventing inappropriate
flows of data/information from the bank to the securities
department and vice versa (Securities and Exchange
Commission, April 2004).
NBFIs with QB, trust or IMA licenses
These types of financial intermediaries are likewise
under the dual supervision of the BSP and the SEC. For
example, investment houses and financing companies that are
primarily under SEC supervision are also supervised by the
BSP as regards their QB functions. The same is true for NBFIs
with trust or IMA licenses.
Parents and subsidiaries with different licenses
Dual supervision may be exercised over subsidiaries
or affiliates of banks. The BSP also supervises, to some extent,
subsidiaries and affiliates of banks that are under SEC
supervision (e.g., affiliate/subsidiary financing companies,
investment houses and other NBFIs).
324 Chapter IX Regulation and Supervision 325
Pre-need Companies
Pre-need companies are currently under the
supervision and regulation of the SEC. The administrative
requirements imposed by the SEC on those engaged in pre-
need business include: prior license from the SEC, registration
of pre-need plans, disclosures to prospective planholders,
advertising guidelines, use of uniform accounting system,
reports and record keeping, capital bonding, establishment of
a trust fund, and the payment of benefits under a pre-need plan
(Section i6, RA 8799).
However, in view of the problems encountered by certain
pre-need companies, particularly in fulfilling their commitment
to provide the services stipulated in the pre-need plan, there is an
increasing clamor to place pre-need companies under the
supervision of the IC.
A pre-need plan is a hybrid product that combines the
features of both insurance and securities. To the extent that it
covers the financial aspect of a future event (i.e., retirement,
education, death, etc.), it is in the nature of an insurance. There
is, therefore, merit in the clamor to transfer the supervision of
pre-need companies to the IC.
Quite recently, however, because of the recent
unpredictable rate of inflation, more pre-need plans have been
structured in such a way that benefits are pre-determined or
defined at the inception of the contract. As an example,
educational plans that used to be open-ended are now in the
nature of fixed-value securities. This fixed-value aspect of pre-
need plans makes it similar to a traditional long-term security
(e.g., zero-coupon bond) with insurance as an overlying
transaction (Accelerating Development in the NBFI Sector and
expanded contribution to the Philippine economy, 2004-2006).
In this aspect, the SEC's authority to regulate and supervise
the pre-need companies is proper.
The final judgment as to which of the two--the SEC or
the IC--will exercise jurisdiction over pre-need companies may
be put to rest by the Pre-need Plan Code that will soon be
enacted. The government has included this enactment as one
of its priority programs.
NSSLAs and BLAs
Nonstock savings and loan associations (NSSLAs) are
subject to the BSP's supervision and regulation. Building and
loan associations (BLAs), on the other hand, are under the
Home Guaranty Corporation (HGC).
It is interesting to note that under RA 8791 (General
Banking Act, May 23, 2000), the supervisory and regulatory
powers over BLAs were granted to the BSP, but only for a period
of three years beginning 2003, the effectivity of RA 8791.
Thereafter, it was transferred to the Home Insurance and
Guaranty Corporation (HIGC), which was later re-named as
the HGC. The transfer is premised on the fact that BLAs are
tasked mainly to promote homebuilding.
Cooperative Banks
Cooperatives are under the regulation and supervision
of the CDA, the government entity tasked to oversee the growth
and development of cooperatives. In addition, and on account
of the nature of their business operations, cooperative banks
are also under the regulation and supervision of the BS? (RA
8791) on account of the nature of their business operations.
There are current proposals to relax the application of
traditional requirements imposed by the BSP on other banks
326 Chapter IX
that are also applied to cooperative banks in view of the fact
that cooperatives are operated mainly to service the needs of
their members and not for profit.
Investment Houses
and Investment Companies
Investment houses, whether performing QB functions
or not, used to be under the supervision and regulation of two
regulatory bodies: the SEC and the BSP. Beginning 1998,
however, and in view of the enactment of RA 7653 (creation of
the BSP, June 14, 1993), which called for the phase-out and
subsequent transfer of the BSP's regulatory powers over finance
companies without QB functions to the SEC, investment houses
without any QB functions are now solely under the supervision
and regulation of the SEC.
Nonetheless, the SEC is still required to refer such
investment houses to the BSP for examination (especially if the
investment house is suspected to be likewise engaged in QB
functions) and to furnish the BSP copies of financial statements
and conditions of such investment houses on a periodic basis.
Investment houses that engage in QB functions
continue to be under the supervision and regulation of the BSP.
Similar to investment houses, investment companies
are likewise under the supervision and regulation of the SEC
(RA 8799).
Regulation and Supervision 327
Lending Investors
As clearly and expressly provided for by PA 7653 (New
Central Bank Act), the supervision and regulatory powers of
the BSP over finance companies and other institutions without
QB functions have been transferred to the SEC. An issue was
raised, however, whether RA 7653 also transfers to the SEC
the BSP's supervisory authority over lending investors engaged
in direct lending. Although clearly a financial activity subject
to the provisions of RA 8556 (Finance Company Act, February
26, 1998), direct lending is deemed to be more of a banking
activity and should therefore be within the regulatory sphere
of the BSP instead of the SEC.
In response to the query of the SEC, the Department of
Justice (DOJ)--in its Opinion No. 46, series of 2001, September
17, 2001--expressed the view that lending investors engaged
in direct lending but not exercising QB functions should be
regulated by the SEC, while those that are affiliates or
subsidiaries of banks or are performing QB functions should
remain under the regulation of the BSP followingthe provisions
of RA 7653, which clearly defined and delineated the regulatory
jurisdiction of the BSP and the SEC.
Since most lending investors are established as single
proprietorships and partnerships, the SEC, pursuant to DOJ
Opinion No. 46, issued Memorandum Circular No.13 (October
11, 2001), which required all existing lending investors
organized as partnerships or single proprietorships to
incorporate (in accordance with RA 8556) as finance
companies. This was likewise required of all registrant
corporations that would engage in direct lending activities. The
implementation of SEC Memorandum Circular No. 13 was,
however, stopped due to a Court of Appeals (CA) decision
invalidating the circular (Easton Credit Corporation v.
Securities Exchange Commission, 2005).
328 Chapter IX Regulation and Supervision 329

To address the long-felt need to enact a law that will Table 9.1
regulate the industry and identify the regulatory agency with Matrix of Supervising Government Agencies
the authority and jurisdiction over lending investors, the
President certified as urgent during the 13th Congress the
approval of a bill that will govern the establishment, operation Institution Supervising Legal Basis
and regulation of lending investors, with the Department of Agency
Trade and Industry (DTI) as the supervising and regulatory
agency Banks BSP RA 8791 (General Banking
Law of 2000)
Universal banks
Commercial banks
Health Maintenance Organizations Thrift banks
Rural banks
Cooperative banks
Health maintenance organizations (HMOs) are Al-Amanah Islamic
required to secure a license from the Department of Health Offshore banking units
(DOH) before they can operate. The DOH is the agency that Foreign banks
currently supervises HMOs (DOH Administrative Order No. Trust entities
34, series of 1994). All financial
intermediaries with QB
There are ongoing efforts to transfer the supervision functions
and regulation of the operations of HMOs to the IC, with the
role of the DOH being restricted to licensing HMOs that will
directly provide health care services (such as medical
consultation and/or treatment by the HMOs' own employed
medical professionals), perform laboratory or diagnostic
services, and operate clinics or hospitals.
332 Chapter IX Regulation and Supervision 333

Table 9.1 (continued) Table 9.1 (continued)

Matrix of Supervising Government Agency Matrix of Supervising Government Agency

Institution Supervising Legal Basis Institution Supervising Legal Basis

Agency Agency

Finance companies SEC RA 8556 (Finance Corrpany Act of Investment houses SEC FD 129 (Investment I-buses Law)
1998) With QB functions SEC/BSP
Finance corrpanies with QB SEC/BSP
Subsidiaries/affiliates of banks SEC/BSP
Finance companies that are SEC/BSP
subsidiaries/affiliates of banks
Subsidiaries/affiliates of NBFis SEC/BSP
with QB license
Finance corrpanies that are SE-CIBSP
subsidiaries/affiliates of NBFIS With authority to engage in SEC/BSP
with QB license trust operations or IMA

Finance corrpanies with SEC/BSP Investment corrpanies SEC RA 2629 (Investment Company
authority to engage in trust Act)
operations or IMA With QB functions SEC/BSP
Securities dealers/brokers SEC RA 8799 (Securities IgiegulatIon
Credit card corrpanies BSP RA 8791 (General Banking Law of
Code)
2000)
1

334 Chapter IX 335

x
CHAPTER
Table 9.1 (continued)
Matrix of Supervising Government Agency
Administrative Aspects
Institution Supervising Legal Basis
Agency
COMPLIANCE AND IMPLEMENTATION
Paw nshops BSP FO 114 (Paw nshops Regulation
Act)

Holding companies SEC Batas Parrbansa Blg. 68

Venture capital corporations
Lending investors
Lending companies that are
subsidiaries/affiliates of banks
Money changers/foreign exchange
dealers
(Corporation Code of the In light of the complicated structure of the tax system
Philippines) applicable to financial institutions in the Philippines, the
administration and implementation of these laws, as well as
BSP PD 1688 the level of compliance of the financial institutions, have
become similarly complex.
SEC Department of Justice Opinion 46,
series of 2001, and SEC Financial institutions are subject to varying types of
Memorandum Circular No. 13, taxes notwithstanding the fact that all of them are engaged in
series of 2001 the same business of financial intermediation.
BSP/SEC RA 8791 (General Banking Law of
2000) As discussed in previous chapters, financial institutions
like banks and quasi-banks are under the gross receipts tax
BSP Circular 471, series of 2005
(GRT) system; life insurance companies are under the premium
BSP
tax system; and others (including non-life insurance companies)
are under the VAT system. The GRT structure is complicated
due to the variation in GRT rates depending on the maturity of
the instruments issued by the financial institutions. The
documentary stamp tax (DST) on documents arising from
transactions with financial institutions is differentiated,
depending on the type of financial institution involved and the
nature of the document issued. For example, the DST on pre-
need plans differs from the DST on life insurance policies.

Monitoring has likewise become difficult, because the

regulation and supervision of financial institutions are under
different autonomous agencies that are not well-linked with
each other in terms of policies and direction. As previously
mentioned, because of the variations in services and types of
336 Chapter X Administrative Aspects
financial institutions, there are a number of agencies involved
in supervising and regulating their operations. In this instance,
the presence of, and the exercise of regulation and supervision
by, so many agencies generates problems in coordination.
All these, in addition to the fact that the financial system
is very dynamic, make tax compliance by the financial
institutions difficult and costly. On the part of tax authorities,
it also makes monitoring complicated and difficult.
stricter monitoring In view of these, and considering the substantial taxes
rules for Fls being generated from the financial sector, the Bureau of
Internal Revenue (BIR) institutionalized special rules and
procedures to strictly monitor the compliance of these financial
institutions with their tax obligations.
For example, all banks and insurance companies have
been placed under a single office--the Large Taxpayers Service
(LTS)--which has sole jurisdiction over them. The LTS is a
special department of the BIR directly under the supervision
of the Commissioner of Internal Revenue. Similarly, stock
brokers and dealers are required to file and pay their DST taxes
with one particular revenue district office (RDO), regardless
of their place of registration. Insurance companies are also
requiredto file and pay their taxes with a single bank designated
by the Insurance Commission (IC).
To complement these measures, several Revenue Audit
Memorandum Orders (RAMOs) for the audit of banks,
insurance companies, stock brokers and dealers, pre-need
companies, health maintenance organizations (HMOs), and
other sectors in the financial system have been issued and are
strictly being implemented by special groups created for this
purpose. All these measures are meant to place the financial
institutions in a special category characterize by the strict
monitoring and supervision of the BIR to ensure proper and
timely compliance with tax rules.
337
ROLE OF FINANCIAL INSTITUTIONS
IN TAX ADMINISTRATION
Aside from the substantial taxes paid by these financial
institutions, the importance of their role in the administration
and collection of taxes by the government is significant.
As accredited agent banks
Accredited agent banks (AABs) play a major role in the
collection of taxes. As required under the law, taxes are to be
paid at accredited banks only. As AABs, banks are required to
accept tax returns and payment of taxes. In fact, the BIR
imposes stiff penalties in case banks fail to comply with the
Bureau's tax collection procedures. All these services are
performed by banks without any compensation from the
government. In most cases, tax payments received by betas
are immediately remitted to the Bureau of Treasury (unlike
before, when banks were given an incentive for retaining the
amount paid for three to five days), particularly the tax
payments of large taxpayers.
As withholding agents
Through the years, the government has relied more and
more on the financial sector to help in the collection of taxes
due from persons transacting with financial institutions. For
example, financial institutions are made statutory payors of
DST in transactions subject to DST to which it is a party, even
 339
338 Chapter X
CHAPTER
if the other party is liable for the payment of the tax. Also,
financial institutions are mandated to file taxes on behalf of
XI Emerging Issues
other persons such as when they act as administrator of
irrevocable trusts. But most importantly, considering the large
amount of money that they regularly handle and the fact that
most of their income payments are subject to withholding taxes,
financial institutions are crucial agents in the collection of taxes As the international capital market continues to
by way of the withholding system. develop, so does the financial system in the Philippines. Some
important developments are discussed below.
More recently, the BIR and the Bangko Sentral ng
Pilipinas (BSP) sought the help of the banking sector in their
drive to flush out underreporting of income. Under RR 04-05
(February 16, 2005) and BSP Circular 472, series of 2005
(February i, 2005), banks are mandated to require from a credit MONEY LAUNDERING
applicant, co-maker, guarantor or surety (as a pre-condition to AND SECRECY PROVISIONS
the granting of a loan) a statement of his assets and liabilities
as well as income and expenses together with a copy of his latest
income tax return duly stamped received by the BIR. Banks
are likewise required to randomly verify with the BIR the money laundering Money laundering is not just a domestic problem but
authenticity of the income tax returns submitted to them by an international problem as well. As defined, money laundering
credit applicants. This seeks to ensure that only tax-compliant is a crime whereby the proceeds of an unlawful activity are
applicants are allowed to apply for credit or act as co-maker, transacted, thereby making them appear to have originated
endorser, surety or guarantor. from legitimate sources [Section 4, Republic Act (RA) No. 9160,
otherwise known as the Anti-Money Laundering Act,
September 29, 2001].

To effectively carry out the intent of RA 9160, an Anti-

Money Laundering Council, composed of the Bangko Sentral
ng Pilipinas (BSP), the Insurance Commission (IC), and the
Securities and Exchange Commission (SEC), was set up to
initiate the investigation of money laundering offenses. The
inclusion of the BSP, the IC and the SEC in the Council is based
on the observation that money laundering is committed through
the facility of a bank, an insurance company, or an investment
company.

Concerns over money laundering cannot be taken

lightly. Such offenses have far-reaching domestic and
340 Chapter XI
international repercussions, considering that fund resources
are moved from one jurisdiction to another. It is for this reason
that the Financial Action Task Force (FATF), an international
financial watchdog, is promoting a concerted action across
international borders against money laundering. In fact, due
to pressure from the international-based FATF, RA 9160 was
amendedby RA 9194 (March 7, 2003), particularly with respect
to the threshold on the amount of transactions covered by its
provisions, which was decreased from P4 million to P500,000.
As may be noted, the FATF has not looked favorably at some of
the provisions of RA 916o.
The Bank Secrecy Law In the Philippines, a key element that could hinder the
detection of money laundering is the Bank Secrecy Law (RA 1405,
September 9, 1955), which prescribes that bank deposits are
confidential in nature and may not be subjected to examination,
except in limited cases such as when there is a written permission
by the depositor, in cases of impeachment, upon order of a
competent court, or when the money deposited is the object of a
litigation. Even the provisions of the Anti-Money Laundering Act
(Section ii., RA 9194) defer to an order by a competent court in
case of any investigation relative to bank accounts. The only
instance when such order is not required is in case of unlawful
activities (e.g., kidnapping, hijacking, or activities relating to RA
9165, otherwise known as the Comprehensive Dangerous Drugs
Act of 2002, June 7, 2002).
The secrecy of bank deposits also applies to foreign
currency deposits. RA 6426 (otherwise known as the Foreign
Currency Deposit Act, April 4, 1972) prescribes that foreign
currency deposits are of a confidential nature and may not be
the subject of an examination unless there is a written
permission from the depositor.
The disclosure of information related to other forms of
investments is governed by the provisions of RA 8791 (the
General Banking Law of 2000, May 23, 2000). Section 55 of
said law prohibits the disclosure of any information relating to
Emerging Issues 341
the funds or properties in the custody of a bank without an
ft ;
order from a competent court.
All of the foregoing laws have made the audit (including
tax audit) and monitoring of bank accounts and related
investments difficult. Consequently, acts of money laundering
or abuses through the use of the banking system would be
difficult to detect. Thus, banks have slightly tightened the rules.
Anonymous accounts or use of fictitious names, aliases or
number codes are no longer allowed. However, foreign currency
deposit accounts may continue to be in numbered accounts in
accordance with the provisions of RA 6426, but are subject to
the condition that the concerned bank shall take necessary
measures to establish and record the true identity of its clients.
There have been a number of proposals to lift the law
on secrecy of bank deposits, but valid objections have been
raised against it, including the possible loss of depositor
confidence in the banking system. The other objection is that
disclosure of sensitive information may put the depositor and
his family in danger of being the target of unscrupulous people.
Practices in Foreign Jurisdiction
In the United States, banks are required to submit a
currency transaction report on deposits or withdrawals of more
than $1o,000 in cash in a day, or purchase of monetary
instruments (money orders, cashier's checks, traveler's cheeks)
with more than $3,000 in cash (Bank Secrecy Act of 1970). For
any such transaction, the bank must report information about
the person undertaking the transaction, including his address
and occupation. If it appears that the person is attempting to
circumvent the report, the bank is required to file a suspicious
activity report (SAR). Both reports are safeguards or means to
detect and minimize money laundering.
342 Chapter XI
Indonesia also has a bank secrecy law (Law number 7/
1992, as amended by Law number 10/1998). Under the law,
information about banks' clients and their deposits is
considered confidential. However, such information may be
obtained in the following cases: (1) in the interest of tax
collection; (2) in debt settlements involvingthe Agencyfor Debt
Affairs and State Auctions; (3) as a result of court proceedings
in criminal cases; (4) in civil court cases between the bank and
its clients; and (5) in exchange of interbank information
(Sjandeini, 2002).
In Switzerland, privacy is recognized as a fundamental
right of any citizen, especially in relation to money matters.
Secrecy is the primary reason for Switzerland's success as a
center of international finance. Swiss banks are obligated to
keep their clients' data, documents, and relationship with the
banks strictly private and confidential. Secrecy may be waived,
however, in criminal investigations (e.g., suspicion of money
laundering, tax fraud, membership in a criminal organization,
theft, blackmail), bankruptcy, and civil proceedings (e.g.,
inheritance and divorce).
The Secrecy Statutes of Panama represent an
accumulation of several laws enacted over the last 7o years.
Currently, the banking system of Panama is regulated by
Cabinet Decree 238 of July 2, 1970, which forbids the
investigation of the private affairs of any bank client or of the
bank itself. Limited access to information may, however, be
granted to the National Banking Commission (the body created
by Cabinet Decree 238 to take charge of the banking system)
upon written request by said Commission. The policy aims to
encourage more capital movements and investments in
Panama (Carlton Press, n.d.).
As the world moves towards a borderless structure,
provisions relating to fund/capital movements are expected to
become more flexible and liberal. Secrecy provisions may have
to be relaxed eventually as a response to this development.
Emerging Issues 343
Financial institutions in the Philippines should be ready
for this consequence and start reviewing, or finding, ways by
which they can adjust to the said development.
REGULATION AND SUPERVISION
The business of banking and insurance in the
Philippines has already been liberalized and opened to foreign-
owned participants to create a more competitive environment
that will enhance financial intermediation through the creation
of new products, services and technology.
liberalization Corollary with liberalization is the need to
institutionalize a self-regulatory organization within the
industries. While continued regulation and supervision by the
concerned government entities may have its own merits, the
industries themselves are, in the end, in a better position to
police their own ranks.
Such an approach is also consistent with the policy of
liberalization. Liberalization is not simply an issue of
ownership. The greater aspect of liberalization has to do with
the ways by which business is conducted in order to achieve
the optimum benefits possible. In this regard, the concerned
industries have to formulate their own frameworks and plans,
given their own business objectives and constraints.
As liberalization matures, regulatory and supervisory
agencies may also find themselves grappling with new products
or services, technologies and other market-driven initiatives.
To effectively carry out their respective mandates, therefore,
these regulatory and supervisory agencies must be equipped
with the technology and competence necessary to adequately
respond to these developments.
344 Chapter XI Emerging Issues 345

TAXES Table 11.1

VAT Treatment of Financial Services

In Other Jurisdictions
VAT on Hs not favored The inclusion of financial services under the scope of
VAT has drawn criticisms. Among the reasons cited then by Countries Particulars
the affected sectors were: (1) the difficulty in applying VAT to
financial services, particularly with respect to the determination Thailand Banks and other financial institutions, like pawnshops,
of qualified inputs for which the appropriate input VAT credit insurance companies, and financial securities firms, are
may be claimed; (2) the impact of a 12% VAT, as against a much
subject to a Specific Business Tax (SBT) of 2.5%, or 3% in
lower GRT rate (7% at the most), on the cost of financial
lieu of the 7% VAT.
intermediation; and (3) the non-applicability of VAT to financial
services in other jurisdictions.
Singapore Exempts certain financial services from the 5% Goods and
It is presumably on the basis of the unique features of Services Tax (the equivalent of the Philippines's 12% VAT)
financial services that their inclusion within the coverage of
the VAT system was deemed inappropriate. Hence, many Republic of Korea Exempts finance and insurance services from the 10% VAT
components of the financial sector (banks, finance companies,
insurance companies, among others) are now under the GRT
system instead of VAT. (Refer to RA 9238 and Section 123, Tax Japan Exempts money lending and financial transactions from the
Code, for details.) However, this approach is not unique to the 5% consumption tax (the equivalent of the Philippines's 12%
Philippines. Compared with their counterparts in other
VAT)
countries, financial services in the Philippines are generally not
subject to VAT.
Taiwan Exempts sales of enterprises engaged in banking, insurance,
Even countries that are members of the Organisation investment trust, securities, futures, commercial paper, and
for Economic Co-operation and Development (OECD) have pawnshops from business tax (the equivalent of the
found it more practical to exempt financial services from VAT. Philippines's 12% VAT)
This is due to the difficulty of determining the appropriate tax
base for financial services. New Zealand Financial services are exempt from the 12.5% Goods and
Services Tax (GST) and can be zero-rated under certain
conditions.

Sources: Goods and Services Tax Act of Singapore, year; Japan M inistryof Finance: Tax
Bureau, 2005; New Zealand Inland Revenue Department, 2004; Pupondh, Thienpreecha
Rattano pas, 2004; Republic of Korea: Ministry of Finance and Economy, 2005; and Taiwan
M inistryof Finance: Taxation and Tariff Committee, 2005.
346 Chapter XI Acronyms 347

Since most components of the financial sector are under

the GRT system, questions or issues about their tax treatment
cannot be avoided.
ANNEX A
Acronyms
inequities in tax There is, for instance, the question of differentiation in
treatment of Fls the tax treatment of life insurance companies vis-a-vis their non-
life counterparts. As it is, life insurance companies are subject to
a 5% premium tax, whereas their non-life counterparts are subject 'as
to the provisions of the 12% VAT (Sections io8 and 123, Tax Code).
There is also a disparity in the taxation of banks to GRT as against
life insurance companies to premium tax. AAB accredited agent bank
ABS asset-backed securities
Pre-need companies are subject to the 12% VAT on the ASEAN Association of South East Asian Nations
sale of pre-need plans, while insurance companies (particularly BAP Bankers' Association of the Philippines
life insurance) are subject to a 5% premium tax. Also, the DST BFP Bureau of Fire Protection
rate applicable to pre-need policies differs from that applicable to BIR Bureau of Internal Revenue
life insurance. While there may be a difference in the nature of BLA building and loan association
their businesses (an insurance is predicated on an unknown or BLGF Bureau of Local Government Finance
contingent event, while a pre-need plan is based on an event that BOI Board of Investments
is bound to happen), both pre-need plans and insurance policies BPRT branch profit remittance tax
are generally acquired for reason of financial protection. BSP Bangko Sentral ng Pilipinas
CA Court of Appeals
The provision of tax privileges to certain components of CBP Central Bank of the Philippines
the financial sector, such as thrift banks, rural banks and CDA Cooperative Development Authority
cooperative banks, raises problems or issues not only with regard CGT capital gains tax
to the appropriateness of using the tax system as a means to COS certificate of sale
promote the growth and development of these components of the CSST cash-settled securities swap transaction
financial sector, but also with regard to tax administration. The CTA Court of Tax Appeals
tax exemption may be abused, especially if the thrift bank is an CTF common trust fund
adjunct of a commercial bank and if there is no effective CWT creditable withholding tax
mechanism to monitor or segregate the transactions of these two DA delegating authority
entities. Similarly, tax exemptions given to transactions with banks DAC deposit administration contract
(such as interest income on long-term loan) but not to other DBP Development Bank of the Philippines
financial intermediaries may cause distortions in the market. DOF Department of Finance
DST documentary stamp tax
The disparities and inconsistencies in the tax treatment DTI Department of Trade and Industry
of the players in the financial market may be something that the EFCDU expanded foreign currency deposit unit
policymakers in the government should address in order to create EO Executive Order
a level playing field in the business of financial intermediation.
348 Annex A Acronyms 349

EVAT expanded value-added tax NAV net asset value

EWT expanded withholding tax NBFI nonbank financial institution/intermediary
FATF Financial Action Task Force NIRC National Internal Revenue Code
FBT fringe benefit tax NPA nonperforming asset
FCDU foreign currency deposit unit NPL nonperforming loan
FI financial institution NSSLA nonstock savings and loan association
FMV fair market value OBU offshore banks/offshore banking unit
FWT final withholding tax OECD Organisation for Economic
FXTN fixed rate treasury note Co-operation and Development
GAAP generally accepted accounting principles OFW overseas Filipino worker
GDAC group deferred annuity contract OR official receipt
GOCC government-owned and PAS Philippine Accounting Standards
-controlled corporation PCIC Philippine Crop Insurance Corporation
GRT gross receipts tax PD Presidential Decree
GSIS Government Service Insurance System PDEx Philippine Dealing and Exchange Corporation
GVA gross value added PDIC Philippine Deposit Insurance Corporation
HDMF Home Development Mutual Fund PEZA Philippine Economic Zone Authority
HGC Home Guaranty Corporation PN promissory note
HMO health maintenance organization PNB Philippine National Bank
IAET improperly accumulate earnings tax POEA Philippine Overseas Employment Agency
IBCL interbank call loan PR Prudential Reporting
IC Insurance Commission PSE Philippine Stock Exchange
IHAP Investment House Association QB quasi-banking
of the Philippines RA Republic Act
IMA investment management account/agreement RAMO Revenue Audit Memorandum Order
IPO initial public offering RB rural bank
ITF individual trust fund RBU regular banking unit
ITH income tax holiday RDO revenue district office
KB commercial bank RFC Rehabilitation Finance Corporation
LBP Land Bank of the Philippines RMC Revenue Memorandum Circular
LBT local business tax RMO Revenue Memorandum Order
LC letter of credit ROP Republic of the Philippines
LFC Local Finance Circular ROPOA real and other properties owned or acquired
LGC Local Government Code RR Revenue Regulations
LGU local government unit SAR suspicious activity report
LTS Large Taxpayers Service SBL securities borrowing and lending
MCIT minimum corporate income tax SC Supreme Court
MSLA master securities lending agreement SEC Securities and Exchange Commission
(

350 Annex A Laws/Regulations on Financial Institutions 351

SME small and medium enterprises

SPE
SPV
special purpose entity
special purpose vehicle
ANNEX B
SSA special savings deposit accounts Laws and Regulations
SSS Social Security System
SIT stock transaction tax a
on Financial Institutions
TB thrift bank
TIN taxpayer identification number
TR trust receipt
ITC top ten thousand corporation
UB universal bank REPUBLIC ACT NO. 9294
VAT value-added tax April 28, 2004
WTC withholding tax on compensation

An Act Restoring the Tax Exemption of Offshore Banking Units (OBUs) and
Foreign Currency Deposit Units (FCDUs), Amending for the Purpose Section 27(D)
and Section 28, Paragraphs (A)(4) and (A)(7)(b) of the National Internal Revenue
Code as Amended

SECTION 1. Section 27, paragraph (D) (3) of the National Internal Revenue Code,
as amended, is hereby further amended to read as follows:

Sec. 27. Rates of Income Tax on Domestic Corporations

(D) Rates of Tax on Certain Passive Incomes.
"(3) Tax on Income Derived under the Expanded Foreign Currency Deposit
System. — Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local commercial banks including
branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency deposit system units and other
depository banks under the expanded foreign currency deposit system shall be
exempt from all taxes, except net income from such transactions as maybe specified
by the Secretary of Finance, upon recommendation by the Monetary Board to be
subject to the regular income tax payable by banks: Provided, however, That interest
income from foreign currency loans granted by such depository banks under said
352 Annex B
expanded system to residents other than offshore banking units in the Philippines
or other depository banks under the expanded system shall be subject to a final tax
at the rate of ten percent (io%).
"Any income of nonresidents, whether individuals or corporations, from
transactions with depository banks under the expanded system shall be exempt
from income tax."
SECTION 2. Section 28, paragraph (A)(4) and (A)(7)(b) of the same Code are
hereby amended to read as follows:
"Sec. 28. Rates of Income Tax on Foreign Corporations. —
"(A) Tax on Resident Foreign Corporations. —
"(1) In General. — Except as otherwise provided in this Code, a corporation
organized, authorized, or existing under the laws of any foreign country, engaged
in trade or business within the Philippines, shall be subject to an income tax
equivalent to thirty five percent (35%) of the taxable income derived in the preceding
taxable year from all sources within the Philippines: Provided, That effective
January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%); and effective January
2000 and thereafter, the rate shall be thirty-two percent (32%).
"In the case of corporations adopting the fiscal-year accounting period the taxable
income shall be computed Without regard to the specific date when sales, purchases
and other transactions occur. Their income and expenses for the fiscal year shall
be deemed to have been earned and spent equally for each month of the period.
"The reduced corporate income tax rates shall be applied on the amount computed
by multiplying the number of months covered by the new rates within the fiscal
year by the taxable income of the corporation for the period, divided by twelve.
"Provided, however, That a resident foreign corporation shall be granted the option
to be taxed at fifteen percent (15%), on gross income under the same conditions, as
provided in Section 27(A).
"(2) Minimum Corporate Income Tax on Resident Foreign Corporations. — A
minimum corporate income tax of two percent (2%) of gross income, as prescribed
under Section 27(E) of this Code, shall be imposed, under the same conditions, on
a resident foreign corporation taxable under paragraph (1) of this Subsection.
Laws/Regulations on Financial Institutions 353
"(3) International Carrier. — An International carrier doing business in the
Philippines shall pay a tax of two and one-half percent (21/2%) on this 'Gross
Philippine Billings' as defined hereunder:
"(a) International Air Carrier. — 'Gross Philippine Billings' refers to the amount
of gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed
to another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only
the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine
Billings.
"(b) International Shipping. — 'Gross Philippine Billings' means gross revenue
whether for passenger, cargo or mail originating from the Philippines up to final
destination, regardless of the place of sale or payments of the passage or freight
documents.
"(4) Offshore Banking Units. — The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by the
Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with
nonresidents, other offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with offshore banking units shall be exempt from all
taxes except net income from such transactions as may be specified by the Secretary
of Finance, upon recommendations of the Monetary Board which shall be subject
to the regular income tax payable by banks: Provided, however, That any interest
income derived from foreign currency loans granted to residents other than offshore
banking units or local commercial banks, including local branches of foreign banks
that maybe authorized by the BSP to transact business with offshore banking units,
shall be subject only to a final tax at the rate of ten percent (io%).
"Any income of nonresidents, whether individuals or corporations, from
transactions with said offshore banking units shall be exempt from income tax. I!
354 Annex B
'(5) Tax on Branch Profits Remittances. — Any profit remitted by a branch to
its head office shall be subject to a tax of fifteen percent (15%) which shall be based
on the total profits applied or earmarked for remittance without any deduction for
the tax component thereof (except those activities which are registered with the
Philippine Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Section 57 and 58 of this Code: Provided, That interests,
dividends, rents, royalties, including remuneration for technical services, salaries,
wages, premiums, annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income and capital gains received by a foreign
corporation during each taxable year from all sources within the Philippines shall
not be treated as branch profits unless the same are effectively connected with the
conduct of its trade or business in the Philippines.
"(6) Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies. —
"(a) Regional or area headquarters as defined in Section 22(DD) shall not be
subject to income tax.
"(b) Regional operating headquarters as defined in Section 22 (EE) shall pay a
tax of ten percent (10%) of their taxable income.
"(7) Tax on Certain Incomes Received by a Resident Foreign Corporation.
"(a) Interest from Deposits and Yield or any other Monetary Benefit from
Deposits Substitutes, Trust Funds and Similar Arrangements and Royalties. —
Interest from any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines shall be subject to a fmal
income tax at the rate of twenty percent (20%) of such interest: Provided however,
That interest income derived by a resident foreign corporation from a depository
bank under the expanded foreign currency deposit system shall be subject to a
final income tax at the rate of seven and one-half percent (71/2%) of such interest
income.
"(b) Income Derived under the Expanded Foreign Currency Deposit System. —
Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business
Laws/Regulations on Financial Institutions 355
with foreign currency deposit system units and other depository banks under the
expanded foreign currency deposit system shall be exempt from all taxes, except
net income from such transactions as may be specified by the secretary of Finance,
upon recommendation by the Monetary Board to be subject to the regular income
tax payable by banks: Provided, however, That interest income from foreign
currency loans granted by such depositors banks under said expanded system to
residents other than offshore banking units in the Philippines or other depository
banks under the expanded system shall be subject to a final tax at the rate of ten
percent (10%).
"Any income of nonresidents, whether individuals or corporations, from
transactions with depository banks under the expanded system shall be exempt
from income tax.
"(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock
Exchange. — A final tax at the rates prescribed below is hereby imposed upon the
net capital gains realized during the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange:
Not over Ploo,000 5%
Any amount in excess of Ploo,000 io%
"(d) Intercorporate Dividends. — Dividends received by a resident foreign
corporation from a domestic corporation liable to tax under this Code shall not be
subject to tax under this Title.
"(B) Tax on Nonresident Foreign Corporation. —
"(1) In General, — Except as otherwise provided in this Code, a foreign
corporation not engaged in trade or business in the Philippines shall pay a tax
equal to thirty-five percent (35%) of the gross income received during each taxable
year from all sources within the Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance, premiums) ; annuities,
emoluments or other fixed or determinable annual periodic or casual gains, profits
and income, and capital gains, except capital gains subject to tax under
subparagraphs 5 (c) and (d): Provided, That effective January 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the-rate
shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter,
the rate shall be thirty-two percent (32%).

356 Annex B Laws/Regulations on Financial Institutions 357

"(2) Nonresident Cinematographic Film Owner Lessor or Distributor. — A Not over Pioo,000 5%
cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five On any amount in excess of Pio,000 10%
percent (25%) of its gross income from all sources within the Philippines.

"(3) Nonresident Owner or Lessor of Vessels Charactered by Philippine
Nationals. — A nonresident owner or lessor of vessels shall be subject to a tax of
four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases
or charters to Filipino citizens or corporations, as approved by the Maritime
Industry Authority.
"(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other
Equipment. — Rentals, charters and other fees derived by a nonresident lessor of
aircraft, machineries and other equipment shall be subject to a tax of seven and
one-half percent (71/2%) of gross rentals or fees.
"(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation.
SECTION 3. Separability Clause. — If any part or provision of this Act shall be
held unconstitutional or invalid, other provisions hereof which are not affected
thereby shall continue to be in full force and effect.
SECTION 4. Repealing Clause. — All laws, decrees, orders, rules and regulations
and other issuances or parts thereof inconsistent with this Act are hereby repealed
or modified accordingly.
SECTION 5. Effectivity. — This Act shall take effect fifteen (15) days after its
publication in the Official Gazette or in two (2) newspapers of general circulation.

"(a) Interest on Foreign Loans. — A final withholding tax at the rate of twenty
percent (20%) is hereby imposed on the amount of interest on foreign loans
contracted on or after August 1,1996;

"(b) Intercorporate Dividends. — A final withholding tax at the rate of fifteen

percent (15%) is hereby imposed on the amount of cash and/or property dividends
received from a domestic corporation which shall be collected and paid as provided
in Section 57(A) of this Code, subject to the condition that the country in which the
nonresident foreign corporation is domiciled, shall allow a credit against the tax
due from the nonresident foreign corporation taxes deemed to have been paid in
the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%)
for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter,
which represents the difference between the regular income tax of thirty-five percent
(35%) in 1997, thirty-four percent (34%) in 1998, thirty-three percent (33%) in
1999, and thirty-two percent (32%) thereafter on corporations and the fifteen
percent (15%) tax on dividends as provided in this subparagraph;

"(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. — A final tax at the rates prescribed below is hereby imposed upon the
net capital gains realized during the taxable year from the sale, barter exchange or
other disposition of shares of stock in a domestic corporation, except shares sold,
or disposed sold, or disposed of through the stock exchange;
 Laws/Regulations on Financial Institutions 359
358 Annex B

REVENUE REGULATIONS NO. 10-98

August- 25, 1998

Implementing the Provisions of the National Internal Revenue Code, As Amended

By Republic Act No. 8424, Relative to the Imposition of Income Taxes on Income
Derived Under the Foreign Currencyffeposit and Offshore Banking Systems

TO All Internal Revenue Officers andOthers Concerned

SCOPE — Pursuant to Section 244, in relation to Sections 24, 25, 27 and 28 of the
National Internal Revenue Code of 1997, as amended by R.A. No. 8424, these
Regulations are hereby promulgated to govern the imposition of income taxes on
income derived under the Foreign Currency Deposit and Offshore Banking Systems.

Sec. 2.22. Definition of Terms. —

(A) Foreign Currency Deposit System — shall refer to the conduct of banking
transactions whereby any person whether natural or juridical may deposit foreign
currencies forming part of the Philippine international reserves, in accordance with
the provisions of Republic Act No. 6426 entitled "An Act Instituting a Foreign
Currency Deposit System in the Philippines, and For Other Purposes."

(B) Foreign Currency Deposit Unit (FCDU) — shall refer to that unit of a local
bank or of a local branch of a foreign bank authorized by the Bangko Sentral Ng
Pilipinas (BSP) to engage in foreign currency-denominated transactions, pursuant
to the provisions of R.A. 6426, as amended. ("Local bank" shall refer to a thrift
bank or a commercial bank organized under the laws of the Republic of the
Philippines. "Local branch of a foreign bank" shall refer to a branch of a foreign
bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337,
as amended).
(C) Offshore Banking System — shall refer to the conduct of banking
transactions in foreign currencies involving the receipt of funds principally from
external and internal sources and the utilization of such fund pursuant to
Presidential Decree No. 1034 as implemented by CB (now BSP) Circular No.1389,
as amended.
(D) Offshore Banking Unit (OBU) — shall mean a branch, subsidiary or affiliate
of a foreign banking corporation which is duly authorized by the Bangko Sentral
360 Annex B
Ng Pilipinas (BSP) to transact offshore banking business in the Philippines in
accordance with the provisions of Presidential Decree No. 1034 as implemented
by CB (now BSP) Circular No. 1389, as amended.
(E) Deposits — shall mean funds in foreign currencies which are accepted and
held by an Offshore Banking Unit or Foreign Currency Deposit Unit in the regular
course of business, with the obligation to return an equivalent amount to the owner
thereof, with or without interest.
(F) Resident — shall mean
(1) an individual citizen of the Philippines residing therein; or
(2) an individual who is not a citizen of the Philippines but is permanently
residing therein; or
(3) a corporation or other juridical person organized under the laws of the
Philippines; or
(4) a branch, subsidiary, affiliate, extension office or other unit of corporations
or juridical persons organized under the laws of any foreign country operating in
the Philippines.
(G) "Non-resident" — shall mean an individual, corporation or other juridical
person not included in the above definition of "resident".
(H) Filipino Overseas Contract Worker (OCW) — means an individual citizen
of the Philippines referred to under Section 23(C) of the Code.
A Filipino Seaman is a citizen of the Philippines who receives compensation for
services rendered abroad as a member of the complement of an ocean-going vessel
engaged exclusively in international trade as referred to under Section 23(C) of
the Code.
Sec. 2.24. Income Tax Rate of Interest Income from Foreign Currency
Deposit. —
(A) Individual Income Tax on Interest Income from a Depository Bank under
the Foreign Currency Deposit System
Laws /Regula lions on Financial Institutions 361
(1) Interest income which is actually or constructively received by a resident
citizen of the Philippines or by a resident alien individual from a foreign currency
bank deposit shall be subject to a final withholding tax of seven and one-half percent
(7.5%). The depository bank shall withhold and remit the tax pursuant to Sections
57 and 58 (withholding tax at source) of the Code.
(2) If a bank account is jointly in the name of a non-resident citizen such as an
overseas contract worker, or a Filipino seaman, and his spouse or dependent who
is a resident in the Philippines, fifty percent (50%) of the interest income from
such bank deposit shall be treated as exempt while the other fifty percent (5o%)
shall be subject to a final withholding tax of seven and one-half percent (7.5%).
(B) Compliance and Administrative Procedures for Non-Resident Citizen and
Non-Resident Alien. The tax on interest income from foreign currency deposit shall
be imposed unless the depositor who is a non-resident citizen or a non-resident
alien can present documentary evidence that he is not a resident of the Philippines.
Such evidence shall consist of the original or certified copy of any of the following:
(1) an immigration visa issued by the foreign government in the country where
he is a resident of; or
(2) a certificate of residency which is issued by the Philippine Embassy or
Consulate in the foreign country of his residence; or
(3) a certificate of the contract of employment of an overseas contract worker
which is duly registered with the Philippine Overseas Employment Agency (POEA);
or a Seaman's Certificate, in the case of a Filipino seaman; or
(4) a certification from the Bureau of Immigration of the Philippines that a
non-resident alien is not a resident of the Philippines; or
(5) a certification from the Department of Foreign Affairs (DFA) of the
Philippines that the individual is a regular member of the diplomatic corps of a
foreign government and is entitled to income tax exemption under an international
agreement to which the Philippines is a signatory.
(C) Name of the Foreign Currency Bank Account — To be entitled to an
exemption from the tax on interest income on foreign currency deposit, the Foreign
Currency Bank Account shall be in the name of the non-resident individual or non-
resident corporation. Otherwise, the interest income therefrom shall be considered
as subject to the tax imposed herein.
 362 Annex B
(D) Illustration.
Mr. Juan de la Cruz, a Filipino citizen who is residing in the Philippines has a US
dollar account with ABC Bank. His gross interest earnings from his bank deposit
for the first quarter of 1998 (i.e. from January r to March 31, 1998) amounted to
US$1,000.00. This gross interest earning shall be considered as constructively
received by Mr. De la Cruz during the first quarter of 1998 and shall be subject to a
seven and one-half percent (7.5%) final withholding tax. The 7.5% final withholding
tax which is due thereon is US$75.o0.
Sec. 2.27 and Sec. 2.28 — Corporate Income Tax on Interest Income from a
_DepositoryBank_under_the_Foreign Currency Deposit System.
(A) Interest income which is actually or constructively received by a domestic
corporation or a resident foreign corporation from a foreign currency bank deposit
shall be subject to a final withholding tax at the rate of seven and one-half percent
(7.5%) based on the gross amount of such interest income. The depository bank
shall withhold and remit the tax pursuant to the provisions of Sections 57 and 58
(withholding tax at source) of the Code.
(B) Compliance and Administrative Procedures for a Non-resident
Corporation. The tax on interest income from foreign currency deposit shall be
imposed unless the depositor, which is a non-resident corporation, can present
documentary evidence that it is not a resident of the Philippines. Such evidence
shall consist of the original or certified copy of all the following requirements:
(1) Certificate of registration of the corporation abroad; and
(2) Certification from the Securities and Exchange Commission (SEC) that
the non-resident corporation is not licensed to do business in the Philippines.
(C) Taxation of Income of an FCDU or OBU from Foreign Currency
Transactions. In general, income derived by an FCDU or an OBU from foreign
currency transactions with residents of the Philippines, including local commercial
banks, local branches of foreign banks, and other depository banks tinder the foreign
currency deposit system, shall be subject to a final withholding tax of ten percent
(io%) based on gross income pursuant to Sec. 27(D)(3) and Sec. 28(A)(4) of the
Code. Income from foreign currency transactions shall include interest income
from lending operations, including bank charges, commissions, service fees, and
net foreign exchange transaction gains.
Laws/Regulations on Financial Institutions 363
Income from foreign currency transactions with non-residents of the Philippines
shall not be subject to income tax.
The person making the income payment shall withhold and remit the tax withheld
pursuant to the provisions of Sections 57 and 58 of the Code. Thus, in the case of
interest payment by a resident of the Philippines on a foreign currency loan from
an OBU or an FCDU, the withholding agent shall be the said resident.
(D) Taxation of Other Incomes of an FCDU or an OBU. Income derived by an
FCDU or an OBU from activities other than foreign currency transactions shall be
subject to the pertinent income tax/taxes prescribed under Section 27 or Section
28 ofthe_Cocle_Toillustrate:income_deriv_edby_anSCD_U_from_consultancy.services_____
and rentals shall be subject to an income tax based on net income at the tax rates
prescribed under Section 27(A) of the Code. Capital gains derived from the sale,
barter, exchange or disposition of shares of stocks in a domestic corporation shall
be subject to tax prescribed under Section 27(D) of the Code.
The aforesaid depository bank shall file its corporate income tax return for income
referred to in the preceding paragraph in accordance with the provisions of Section
52 of the Code. It shall also declare thereunder all other incomes derived during
the taxable period which are subject to the final withholding taxes, the fact that
such final withholding taxes have been withheld therefrom by the payor
notwithstanding, indicating the following information:
(a) Name of the withholding agent;
(b) His/its address;
(c) His/its Taxpayer Identification Number (TIN);
(d) Period covered;
(e) Gross Income;
(f) Rate of final withholding tax applied; and
(g) Amount of final withholding tax withheld.
The submission of the foregoing information shall not be required with respect to
its interest income derived from bank deposits.
Sec. 2.58. Information Requirement for Depositors/Taxpayers Exemptfrom
Withholding Tax on Interest Income from Foreign Currency Deposits. —
The Depository Bank shall submit with its quarterly withholding tax remittance
prescribed under Sec. 58(A) of the Code a list of all persons and corporations who
were given exemption from the tax on interest income on foreign currency deposits.
364 Annex B
To avail of the exemption from the tax on interest income from foreign currency
deposit, the depositor is required to execute a written permission allowing its
depository bank to inform the Commissioner of Internal Revenue that as a non-
resident, the depositor is exempt from the tax. A depositor who fails to comply
with this requirement, which constitutes a limited waiver of the confidentiality of
foreign currency deposits, shall not be entitled to the exemption privilege.
EFFECTIVITY CLAUSE. These Regulations shall apply on taxable income
derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA
8424 In case of deposits which were made in 1 997, only that portion of interest
which was actually or constructively received by a depositor starting January 1,
1998 is taxable.
TRANSITORY PROVISION. No penalty shall be imposed for late payment of the
tax herein prescribed for the first three quarters of calendar year 1998, provided,
however, that the taxpayer's corresponding tax returns for the said taxable quarters
are filed and the taxes due are paid not later than October 25, 1998.
(SGD.) EDGARDO B. ESPIRITU
Secretary of Finance
Recommending Approval:
(SGD.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue
Laws/Regulations on Financial Institutions 365
REPUBLIC ACT NO. 9238
February 5, 2004*
An Act Amending Certain Sections of the National Internal Revenue Code of 1997,
As Amended, By Excluding Several Services from the Coverage of the Value-Added
Tax and Re-imposing the Gross Receipts Tax on Banks and Nonbank Financial
Intermediaries Performing Quasi-banking Functions and Other Nonbank
Financial Intermediaries Beginning January 1, 2004
SECTION 1. Section 108 of the National Internal Revenue Code of 1997, as
amended, is hereby further amended to read as follows:
"(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (io%) of the gross receipts, derived from
the sale or exchange of services, including the use or lease of properties.
The phrase 'sale or exchange of services' means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors;
stock, real estate, commercial, customs and immigration brokers; lessors of
property, whether personal or real; warehousing services; lessors or distributors
of cinematographic films; persons engaged in milling, processing, manufacturing
or repacking goods for others; proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers;
dealers in securities; lending investors; transportation contractors on their
transport of goods or cargoes, including persons who transport goods or cargoes
for hire and other domestic common carriers by land, air and water relative to
their transport of goods or cargoes; services of franchise grantees of telephone and
telegraph, radio and television broadcasting and all other franchise grantees except
those under Section 119 of this Code; and non-life insurance companies (except
their crop insurances), including surety, fidelity, indemnity and bonding companies;
and similar services regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties. The phrase 'sale or exchange
of services' shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent,
design or model, plan, secret formula or process, goodwill, trademark, trade brand
or other like property or right;
366 Annex B
(2) The lease or the use of, or the right to use of any industrial, commercial or
scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or
information;
(4) The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of any such property,
or right as is mentioned in subparagraph (2) or any such knowledge or information
as is mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the installation or
operation of any brand, machinery or other apparatus purchased from such
nonresident person;
(6) The supply of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed irrespective of the
place where the contract of lease or licensing agreement was executed if the property
is leased or used in the Philippines.
The term 'gross receipts' means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and deposits
and advanced payments actually or constructively received during the taxable
quarter for the services performed or to be performed for another person, excluding
value-added tax.
(B) Transactions Subject to Zero Percent (o%) Rate. — The following services
performed in the Philippines by VAT-registered persons shall be subject to zero
percent (o%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported, where
Laws/Regulations on Financial Institutions 367
the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
(3) Services rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to zero percent (o%) rate;
(4) Services rendered to vessels engaged exclusively in international shipping;
and
(5) Services performed by subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales exceed
seventy percent (70%) of total annual production.
(C) Determination of Tax. — The tax shall be computed by multiplying the
total amount indicated in the official receipt by one-eleventh (1/11)."
SECTION 2. Section 109 of the same Code is hereby amended by rewording
paragraph (1) and inserting additional paragraphs after (z) which shall now read as
follows:
"SEC. 109. Exempt Transactions. — The following shall be exempt from the
value-added tax:
(a) Sale of nonfood agricultural products; marine and forest products in their
original state by the primary producer or the owner of the land where the same are
produced;
(b) Sale of cotton and cotton seeds in their original state; and copra;
(c) Sale or importation of agricultural and marine food products in their
original state, livestock and poultry of a kind generally used as, or yielding or
producing foods for human consumption; and breeding stock and genetic materials
therefor.

368 Annex B
Products classified under this paragraph and paragraph (a) shall be considered in
their original state even if they have undergone the simple processes of preparation
or preservation for the market, such as freezing, drying, salting, broiling, roasting,
smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and
molasses, and ordinary salt shall be considered in their original state;
(d) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish,
prawn, livestock and poultry feeds, including ingredients, whether locally produced
or imported, used in the manufacture of finished feeds (except specialty feeds for
race horses, fighting cocks, aquarium fish, zoo animals and other animals generally
considered as pets);
(e) Sale or importation of coal and natural gas, in whatever form or state, and
petroleum products (except lubricating oil, processed gas, grease, wax and
petrolatum) subject to excise tax imposed under Title VI;
(f) Sale or importation of raw materials to be used by the buyer or importer
himself in the manufacture of petroleum products subject to excise tax, except
lubricating oil, processed gas, grease, wax and petrolatum;
Importation of passenger and/or cargo vessels of more than five thousand
(g)
tons (5,000), whether coastwise or ocean-going, including engine and spare parts
of said vessel to be used by the importer himself as operator thereof;
(h) Importation of personal and household effects belonging to the residents
of the Philippines returning from abroad and nonresident citizens coming to resettle
in the Philippines: Provided, That such goods are exempt from customs duties under
the Tariff and Customs Code of the Philippines;
(i) Importation of professional instruments and implements, wearing apparel,
domestic animals, and personal household effects (except any vehicle, vessel,
aircraft, machinery, other goods for use in the manufacture and merchandise of
any kind in commercial quantity) belonging to persons coming to settle in the
Philippines, for their own use and not for sale, barter or exchange, accompanying
such persons, or arriving within ninety (9o) days before or after their arrival, upon
the production of evidence satisfactory to the Commissioner, that such persons
are actually coming to settle in the Philippines and that the change of residence is
bona fide;
(j) Services subject to percentage tax under Title V;
Laws/Regulations on Financial Institutions 369
(k) Services by agricultural contract growers and milling for others of palsy
into rice, corn into grits and sugar cane into raw sugar;
(1) Medical, dental, hospital and veterinary services except those rendered by
professionals;
(m) Educational services rendered by private educational institutions, duly
accredited by the Department of Education, Culture and Sports (DECS) and the
Commission on Higher Education (CHED), and those rendered by government
educational institutions;
(n) Sale by the artist himself of his works of art, literary works, musical
compositions and similar creations, or his services performed for the production
of such works;
(o) Services rendered by individuals pursuant to an employer-employee
relationship;
(p) Services rendered by regional or area headquarters established in the
Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not earn or derive income from the
Philippines;
(q) Transactions which are exempt under international agreements to which
the Philippines is a signatory or under special laws, except those under Presidential
Decree Nos. 66, 529 and 159o;
(r) Sales by agricultural cooperatives duly registered with the Cooperative
Development Authority to their members as well as sale of their produce, whether
in its original state or processed form, to non-members; their importations of direct
farm inputs, machineries and equipment, including spare parts thereof, to be used
directly and exclusively in the production and/or processing of their produce;
(s) Sales by electric cooperatives duly registered with the Cooperative
Development Authority or National Electrification Administration, relative to the
generation and distribution of electricity as well as their importation of machineries
and equipment, including spare parts, which shall be directly used in the generation
and distribution of electricity;
 370 Annex B
(t) Gross receipts from lending activities by creditor multipurpose cooperatives
duly registered with the Cooperative Development Authority whose lending
operation is limited to their members;
(u) Sales by non-agricultural, non-electric and non-credit cooperatives duly
registered with the Cooperative Development Authority: Provided, That the share
capital contribution of each member does not exceed Fifteen thousand pesos
(P15,000) and regardless of the aggregate capital and net surplus ratably distributed
among the members;
(v) Export sales by persons who are not VAT-registered;
(w) Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business or real property utilized for low-
cost and socialized housing as defined by Republic Act No. 7279, otherwise known
as the Urban Development and Housing Act of 1992, and other related laws, house
and lot and other residential dwellings valued at One million pesos (P1,000,000)
and below: Provided, That not later than January 31st of the calendar year
subsequent to the effectivity of this Act and each calendar year thereafter, the
amount of One million pesos (P1,000,000) shall be adjusted to its present value
using the Consumer Price Index, as published by the National Statistics Office
(NSO);
(x) Lease of a residential unit with a monthly rental not exceeding Eight
thousand pesos (P8,000): Provided, That not later than January 31st of the calendar
year subsequent to the effectivity of Republic Act No. 8241 and each calendar year
thereafter, the amount of Eight thousand pesos (P8,000) shall be adjusted to its
present value using the Consumer Price Index as published by the National Statistics
Office (NSO);
(y) Sale, importation, printing or publication of books and any newspaper,
magazine, review or bulletin which appears at regular intervals with fixed prices
for subscription and sale and which is not devoted principally to the publication of
paid advertisements;
(z) Sale or lease of goods or properties or the performance of services other
than the transactions mentioned in the preceding paragraphs, the gross annual
sales and/or receipts do not exceed the amount of Five hundred fifty thousand
pesos (P550,000): Provided, That not later than January 31st of the calendar year
subsequent to the effectivity of Republic Act No. 8241 and each calendar year
Laws/Regulations on Financial Institutions 371
thereafter, the amount of Five hundred fifty thousand pesos (P550,000) shall be
adjusted to its present value using the Consumer Price Index, as published by the
National Statistics Office (NSO);
(aa) Services of banks, non-bank financial intermediaries performing quasi-
banking functions, and other non-bank financial intermediaries;
(bb) Services rendered by doctors of medicine duly registered with the
Professional Regulation Commission (PRC); and
(cc) Services rendered by lawyers duly registered with the Integrated Bar of
the Philippines (IBP).
The foregoing exemptions to the contrary notwithstanding, any person whose sale
of goods or properties or services which are otherwise not subject to VAT, but who
issues a VAT invoice or receipt therefor shall, in addition to his liability to other
applicable percentage tax, if any, be liable to the tax imposed in Section 1o6 or 108
without the benefit of input tax credit, and such tax shall also be recognized as
input tax credit to the purchaser under Section izo, all of this Code."
SECTION 3. Section 121 of the National Internal Revenue Code of 1997, as
amended, is hereby restored with amendments to read as follows:
"SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries
Performing Quasi BankingFunctions. — There shall be collected a tax on gross
receipts derived from sources within the Philippines by all banks and non-banks
financial intermediaries in accordance with the following schedule:
(a) On interest, commissions and discounts from lending activities as well as
income from financial leasing, on the basis of remaining maturities of instruments
from which such receipts are derived:
Maturity period is five years or less 5%
Maturity period is more than five years 1%
(b) On dividends and equity shares in net income of subsidiaries - o%
(c) On royalties, rentals of property, real or personal, profits from exchange
and all other items treated as gross income under Section 32 of this Code -
 Laws/Regulations on Financial Institutions 388
384 Annex B

Applicable Gross receipt tax Registration and other registration-related documents shall likewise follow the same
Year Remaining Amount of
procedures done in 2003.
maturity interest, etc. tax rate

5%
(2) Unused VAT Receipts. — Taxpayers who change status from VAT to Non-
2004 4 P100,000 P5,000
VAT as a result of RA 9238 shall be required to submit, on or before July 31, 2004,
2005 3 P 100,000 5% P5,000
P5,000 to the BIR office having jurisdiction over the taxpayers' head office an inventory of
2006 2 P100,000 5%
P5,000 unused VAT invoice/receipts as of February 13, 2004, the last working day prior to
2007 1 P100,000 5%
the publication of RA 9238 on February 16, 2004, indicating the number of booklets
2008 Less than
and the corresponding serial numbers of said unused VAT invoices/receipts. It is
1 year P100,000 5%
stressed, moreover, that starting February 16, 2004, financial institutions covered
P25,000
by Sections 121 and 122 of the Tax Code must be issuing non-VAT invoices/receipts
as enunciated in Revenue Memorandum Circular No. 9-2004. For this purpose,
P25,000
financial institutions shall be allowed, up to July 31, 2004, to use unused VAT
Total Gross Receipts Tax
receipts included in the inventory of unused VAT receipts as of February 13, 2004
Less: Gross Receipts Tax
P9,000
required to be submitted herein, provided, they are clearly stamped with the word
Previously paid
"Non-VAT receipt", and countersigned by a duly-authorized officer of the financial
P16,000 institution-taxpayer.
Gross Receipts Tax Due as Recomputed
Cost of unused VAT invoices/receipts, as listed in the inventory submitted, shall
be allowed as an income tax deduction for taxable year 2004.
SECTION 6. Time and Venue for the Filing and Payment of GRT. — The GRT
due computed and determined in accordance with these Regulations shall be paid
(3) Taxability of Collections Received On or Before December 31, 20493 On
monthly within 20 days following the end of the taxable month using BIR Form
2551M to the concerned AAB of the RDO/LTDO/LTAID I where the taxpayer is Account of Services to be Rendered Thereafter As Well as Services Rendered On
registered or required to be registered. Provided, that, if the taxpayer is an EFPS
or Before Dec. 31, 2003 the Considerations for Which Were Received Thereafter
taxpayer, the rules and regulations governing the filing of returns and payment of — Collections forming part of gross receipts on or before December 31, 2003 are
supposed to have been subjected to VAT, the last payment date of which is January
taxes under EFPS shall be observed.
20/25, which collection shall no longer be subject to the payment of GRT. Advance
payments received on or before December 31, 2003 where the services thereof are
SECTION 7. Transitory Provisions. —
to be rendered after such date shall not be considered as income earned beginning
Conversion From VAT-Registered Taxpayer to That of Non-VAT January 1, 2004 subject to GRT considering that the same has already been
(1)
subjected to VAT in the previous year. On the other hand, services rendered prior
Taxpayer. — Affected VAT-registered banks, non-bank financial intermediaries
performing quasi-banking functions and other non-bank financial intermediaries to December 31, 2003, the considerations for which were received thereafter and
are required to update their corresponding registration records with the concerned therefore not reflected in any VAT return filed shall be subject to GRT.
BIR Office by filing the necessary registration update forms (BIR Form No. 1905)
converting their status from VAT-registered taxpayer to that of Non-VAT taxpayer (4) Transition Period in the Filing of Tax Return and Payment of Tax.
on or before July 31, 2004. Provided, that, all Large Taxpayers that went through
a. All financial institutions are required to file a VAT return and pay value added
the centralized registration procedures at the BIR National Office in converting
tax on or before February 2o/25, 2004 for all of their transactions for the month of
their status from non-VAT to VAT in year 2003 shall follow the same procedure in
January 2004, without any deduction of whatsoever nature, other than the
converting their status from VAT to non-VAT. Release of the Certificates of
creditable VAT withheld by government institutions, such as the Bureau of Treasury
1 ►
386 Annex B
1 I
and the Bangko Sentral ng Pilipinas (BSP). In addition to the foregoing, all financial
institutions are required to file a gross receipt tax return and pay the gross receipt
tax due on all their transactions for the month of January 2004, without any
deduction or adjustment of whatsoever nature.
b. All financial institutions are required to file a VAT return and pay value added
tax on or before March 2o/25, 2004 for all of their transactions for the period of
February 1-16, 2004, without any deduction of whatsoever nature, other than the
.creditable VAT withheld by government institutions, such as the Bureau of Treasury
and the Bangko Sentral ng Pilipinas (BSP). In addition to the foregoing, all financial
institutions are required to file a gross receipt tax return and pay the gross receipt
tax due on all their transactions for the month of February 2004, without any
deduction or adjustment of whatsoever nature.
c. Under the presumption that all financial institutions are in full compliance hereof,
i.e., all transactions of all financial institutions are covered by NON-VAT receipt,
all financial institutions shall thereafter be required to file the quarterly VAT return
for the first quarter of 2004 to cover for all of its transaction for the period beginning
January 1, 2004 to February 16, 2004 reported in the two preceding paragraph
under this subsection, said quarterly VAT return shall be the last VAT return to be
filed by financial institutions.
Additional clarification, guidelines and procedures in the filing of VAT returns and
Percentage Tax Returns (GRT) during the transition period shall be released by
the Bureau of Internal Revenue through a Revenue Memorandum Circular.
(5) Excess Input Tax Credits — Excess input tax credits on hand of taxpayers
whose status has changed from VAT to Non-VAT taxpayers shall be governed by
Section 112 of the Tax Code.
(6) Period Within Which Erroneously-Paid VAT of Customers May Be
Refunded from the Financial Institutions payee — For transactions entered into
starting January 1, 2004 up to February 13, 2004 (the last working day before the
publication of R.A. 9238) for which VAT receipts were issued, clients may refund
from the financial institution-payee, on or before June 30, 2004, erroneously paid
VAT provided the issued VAT receipts are surrendered to the financial institution
and the latter cancels the same upon issuance of non-VAT receipts in place thereof.
(7) Period Within Which Financial Institutions May Credit against GRT
Liability Erroneously Collected and Remitted VAT Subsequently Refunded to
Laws/Regulations on Financial Institutions 387
Clients — The financial institutions are allowed to credit against GRT liability reflected
in either the March 2004 GRT return or the April 2004 GRT return erroneously collected
and remitted VAT subsequently refunded to clients. Provided, said credit shall be
substantiated by attaching to their March 2004 GRT return or the April 2004 GRT
return a summary schedule of the cancelled VAT receipt reflecting the VAT Receipt
Number, Date of Issuance, Name of Customer, and the Non-VAT Receipt Number of
the Non-VAT Receipt Issued as Substitute. The cancelled VAT Receipt should clearly
show and bear on the face thereof the word "cancelled".
(8) Amendment of VAT Returns and Percentage Tax Returns Already Due and
Filed Prior to Release of These Regulations — VAT Returns and Percentage Tax Returns
Already Due and Filed Prior to Release of These Regulations that need to be amended
as a result of the issuance and requirements hereof may be filed without penalty until
July 31, 2004.
SECTION 8. Separability Clause. — If any provision of this Regulations is held
unconstitutional or invalid, all other provisions not affected thereby shall remain valid.
SECTION 9. Repealing Clause. — Revenue Regulations No. 18-99, Revenue
Regulations No. 12-2003, and Revenue Regulations No. 20-2003 are hereby expressly
repealed. Provisions of all other revenue issuances, or portions thereof which are
inconsistent with the provisions of these Regulations are hereby likewise amended,
modified or revoked accordingly.
SECTION 10. Effectivity Clause. — These Regulations shall take effect immediately
unless otherwise provided in R.A. 9238.
(SGD.) JUANITA D. AMATONG
Secretary of Finance
Recommending Approval:
(SGD.) GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue
 i
li

388 Annex B Laws/Regulations on Financial Institutions 389

REPUBLIC ACT NO. 9243

February 17, 2004

An Act Rationalizing the Provisions on the Documentary Stamp Tax of the

National Internal Revenue Code of 1997 As Amended, and for Other Purposes

SECTION 1. Section 174 of the National Internal Revenue Code of 1997, as

amended, is hereby deleted.
SECTION 2. Section 175 of the National Internal Revenue Code of 1997, as
amended, is hereby renumbered as Section 174 and further amended as follows:
"SEC. 174. Stamp Tax on Original Issue of Shares of Stock. — On every
original issue, whether on organization, reorganization or for any lawful purpose,
of shares of stock by any association, company or corporation, there shall be
collected a documentary stamp of One peso (P1.00) on each Two hundred pesos
(P2oo), or fractional part thereof, of the par value, of such shares of stock: Provided,
That in the case of the original issue of shares of stock without par value, the amount
of the documentary stamp tax herein prescribed shall be based upon the actual
consideration for the issuance of such shares of stock: Provided, further, That in
the case of stock dividends, on the actual value represented by each share."

SECTION 3. Section 176 of the National Internal Revenue Code of 1997, as

amended, is hereby renumbered as Section 175 and further amended as follows:

"SEC. 175. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales,

Deliveries or Transfer of Shares or Certificates of Stock. — On all sales, or
agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or
certificates of stock in any association, company, or corporation, or transfer of
such securities by assignment in blank, or by delivery, or by any paper or agreement,
or memorandum or other evidences of transfer or sale whether entitling the holder
in any manner to the benefit of such stock, or to secure the future payment of
money, or for the future transfer of any stock, there shall be collected a documentary
stamp tax of Seventy-five-centavos (P0.75) on each Two hundred pesos (P200), or
fractional part thereof, of the par value of such stock: Provided, That only one tax
shall be collected on each sale or transfer of stock from one person to another,
regardless of whether or not a certificate-of stock is issued, indorsed, or delivered
in pursuance of such sale or transfer: and Provided, further, That in the case of
390 Annex B
stock without par value the amount of the documentary stamp tax herein prescribed
shall be equivalent to twenty-five percent (25%) of the documentary stamp tax
paid upon the original issue of said stock."
SECTION 4. Section 177 to 179 of the National Internal Revenue Code of 1997,
as amended, are hereby renumbered as Sections 176 to 178.
SECTION 5. Section 18o of the National Internal Revenue Code of 1997, as
amended, is hereby renumbered as Section 179 and further amended to read as
follows:
"SEC. 179. Stamp Tax on All Debt Instruments. — On every original issue of
debt instruments, there shall be collected a documentary stamp tax on One peso
(Pi.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue
price of any such debt instruments: Provided, That for such debt instruments with
terms of less than one (1) yeak, the documentary stamp tax to be collected shall be
of a proportional amount in accordance with the ratio of its term in number of
days to three hundred sixty-five (365) days: Provided, further, That only one
documentary stamp tax shall be imposed on either loan agreement, or promissory
notes issued to secure such loan.
For purposes of this section, the term debt instrument shall mean instruments
representing borrowing and lending transactions including but not limited to
debentures, certificates of indebtedness, due bills, bonds, loan agreements,
including those signed abroad wherein the object of contract is located or used in
the Philippines, instruments and securities issued by the government of any of its
instrumentalities, deposit substitute debt instruments, certificates or other
evidences of deposits that are either drawing interest significantly higher than the
regular savings deposit taking into consideration the size of the deposit and the
risks involved or drawing interest and having a specific maturity date, orders for
payment of any sum of money otherwise than at sight or on demand, promissory
notes, whether negotiable or non-negotiable, except bank notes issued for
circulation."
SECTION 6. A new section numbered Section 180 of the National Internal
Revenue Code of 1997, as amended, is hereby inserted to read as follows:
"SEC. 180. Stamp Tax on All Bills of Exchange or Drafts. — On all bills of
exchange (between points within the Philippines) or drafts, there shall be collected
a documentary stamp tax of Thirty centavos (Po.3o) on each Two hundred pesos
Laws/Regulations on Financial Institutions 391
(P200), or fractional part thereof, of the face value of any such bill of exchange or
draft."
SECTION 7. Section 183 of the National Internal Revenue Code of 1997, as
amended, is hereby further amended to read as follows:
"SEC. 183. Stamp Tax on Life Insurance Policies. — On all policies of
insurance or other instruments by whatever name the same may be called, whereby
any insurance shall be made or renewed upon any life or lives, there shall be collected
a documentary stamp tax of Fifty centavos (P0.50) on each Two hundred pesos
(P2oo), or fractional part thereof, of the amount of premium collected."
SECTION 8. Section 186 of the National Internal Revenue Code of 1997, as
amended, is hereby further amended to read as follows:
"SEC. 186. Stamp Tax on Policies of Annuities and Pre-Need Plans. — On all
policies of annuities, or other instruments by whatever name the same may be
called, whereby an annuity may be made, transferred or redeemed, there shall be
collected a documentary stamp tax of Fifty centavos (P0.50) on each Two hundred
pesos (P2oo), or fractional part thereof, of the premium or installment payment or
contract price collected. On pre-need plans, the documentary stamp tax shall be
Twenty centavos (Po.2o) on teach Two hundred pesos (P2oo), or fractional part
thereof, of the premium or contribution collected."
SECTION 9. Section 199 of the National Internal Revenue Code of 1997, as
amended is hereby further amended to read as follows:
"SEC. 199. Documents and Papers Not Subject to Stamp Tax. — The
provisions of Section 173 to the contrary notwithstanding, the following
instruments, documents and papers shall be exempt from the documentary stamp
tax:
(a) Policies of insurance or annuities made or granted by a fraternal or
beneficiary society, order, association or cooperative company, operated on the
lodge system or local cooperation plan and organized and conducted solely by the
members thereof for the exclusive benefit of each member and not for profit.
(b) Certificates of oaths administered to any government official in his official
capacity or of acknowledgment by any government official in the performance of
his official duties, written appearance in any court by any government official, in
392 Annex B
his official capacity; certificates of the administration of oaths to any person as to
the authenticity of any paper required to be filed in court by any person or party
thereto, whether the proceedings be civil or criminal; papers and documents filed
in courts by or for the national, provincial, city or municipal governments; affidavits
of poor persons for the purpose of proving poverty; statements and other
compulsory information required of persons or corporations by the rules and
regulations of the national, provincial, city or municipal governments exclusively
for statistical purposes and which are wholly for the use of the bureau or office in
which they are filed, and not at the instance or for the use or benefit of the person
filing them; certified copies and other certificates placed upon documents,
instruments and papers for the national, provincial, city or municipal governments,
made at the instance and for the sole use of some other branch of the national,
provincial, city or municipal governments; and certificates of the assessed value of
lands, not exceeding Two hundred pesos (P2oo) in value assessed, furnished by
the provincial, city or municipal Treasurer to applicants for registration of title to
land.
(c) Borrowing and lending of securities executed under the Securities
Borrowing and Lending Program of a registered exchange, or in accordance with
regulations prescribed by the appropriate regulatory authority: Provided, however,
That any borrowing or lending of securities agreement as contemplated hereof shall
be duly covered by a master securities borrowing and lending agreement acceptable
to the appropriate regulatory authority, and which agreement is duly registered
and approved by the Bureau of Internal Revenue (BIR).
(d) Loan agreements or promissory notes, the aggregate of which does not
exceed Two hundred fifty thousand pesos (P250,000), or any such amount as may
be determined by the Secretary of Finance, executed by an individual for his
purchase on installment for his personal use or that of his family and not for business
or resale, barter or hire of a house, lot, motor vehicle, appliance or furniture:
Provided, however, That the amount to be set by the Secretary of Finance shall be
in accordance with a relevant price index but not to exceed ten percent (l0%) of
the current amount and shall remain in force at least for three (3) years.
(e) Sale, barter or exchange of shares of stock listed and traded through the
local stock exchange for a period of five (5) years from the effectivity of this Act.
(f) Assignment or transfer of any mortgage, lease or policy of insurance, or
the renewal or continuance of any agreement, contract, charter, or any evidence of
Laws/Regulations on Financial Institutions 393
obligation or indebtedness, if there is no change in the maturity date or remaining
period of coverage from that of the original instrument.
(g) Fixed income and other securities traded in the secondary market or
through an exchange.
(h) Derivatives: Provided, That for purposes of this exemption, repurchase
agreements and reverse repurchase agreements shall be treated similarly as
derivatives.
(i) Interbranch or interdepartmental advances within the same legal entity.
(j) All forbearance arising from sales or service contracts including credit card
and trade receivables: Provided, That the exemption be limited to those executed
by the seller or service provider itself.
(k) Bank deposit accounts without a fixed term or maturity.
(1) All contracts, deeds, documents and transactions related to the conduct of
business of the Bangko Sentral ng Pilipinas.
(m) Transfer of property pursuant to Section 4o (c)(2) of the National Internal
Revenue Code of 1997, as amended.
(n) Interbank call loans with maturity of not more than seven (7) days to cover
deficiency in reserves against deposit liabilities, including those between or among
banks and quasi-banks."
SECTION to. Implementing Rules and Regulations. — The Secretary of Finance,
the Bangko Sentral Governor and the Securities and Exchange Commission
Chairperson shall promulgate and publish the necessary rules and regulations for
the effective enforcement of this Act.
SECTION 11. Separability Clause. — If any provision of this Act is held
unconstitutional or invalid, all other provisions not affected thereby shall remain
valid.
SECTION 12. Repealing Clause. — All laws, decrees, executive orders, rules and
regulations or parts thereof, which are inconsistent with this Act, are hereby
repealed, amended or modified accordingly.
394 Annex B Laws/Regulations on Financial Institutions 395

SECTION 13. Effectivity. — This Act shall take effect fifteen (15) days following REVENUE REGULATIONS NO. 13-04
its publication in the Official Gazette or in two (2) newspapers of general circulation. December 23, 2004
Approved: February 17, 20 04
Implementing the Provisions of Republic Act No. 9243, An Act Rationalizing the
Provisions on the Documentary Stamp Tax of the National Internal Revenue Code
of 1997 as Amended, and for Other Purposes

TO All Internal Revenue Officials and Others Concerned

SECTION 1. Scope. —
Pursuant to the provisions of Section 4 of Republic Act No. 8424 and Section 244
of the National Internal Revenue Code of 1997 (Code), these Regulations are hereby
promulgated to implement the provisions of Republic Act (R.A.) No. 9243, otherwise
known as "An Act Rationalizing the Provisions on the Documentary Stamp Tax of
the National Internal Revenue Code of 1997, as Amended, and for Other Purposes."
SECTION 2. Renumbering of Sections Under Title VII (Documentary Stamp
Tax) of the Code of 1997. —

As a result of the amendments introduced by R.A. No. 9243, the Sections under
Title VII of the Code are now accordingly titled, numbered or renumbered and
amended, and with affected Sections highlighted as follows:
"SEC. 173. Stamp Taxes upon Documents, Loan Agreements, Instruments
and Papers."

"SEC. 1 .74. Stamp Tax on Original Issue of Shares of Stock." (Renumbered

and amended)
"SEC. 175. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales,
Deliveries or Transfer of Shares or Certificates of Stock." (Renumbered and
amended)
"SEC. 176. Stamp Tax of Bonds, Debentures, Certificates of Stock or
Indebtedness Issued in Foreign Countries." (Renumbered)

"SEC. 177. Stamp Tax on Certificates of Profits or Interest in Property or

Accumulations." (Renumbered)
396 Annex B
"SEC. 178. Stamp Tax on Bank Checks, Drafts, Certificates of Deposit not
Bearing Interest, and other Instruments." (Renumbered)
"SEC. 179. Stamp Tax onAll Debt Instruments."(Renumbered and amended)
"SEC. 180. Stamp Tax on All Bills of Exchange or Drafts." (Amended)
"SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others."
"SEC. 182. Stamp Tax on Foreign Bills of Exchange and Letters of Credit."
"SEC. 183. Stamp Tax on Life Insurance Policies." (Amended)
"SEC. 184. Stamp Tax on Policies of Insurance Upon Property."
"SEC. 185. Stamp Tax on Fidelity Bonds and Other Insurance Policies."
"SEC. 186. Stamp Tax on Policies of Annuities and Pre Need Plans."
(Amended)
"SEC. 187. Stamp Tax on Indemnity Bonds."
"SEC. 188. Stamp Tax on Certificates."
"SEC. 189. Stamp Tax on Warehouse Receipts."
"SEC. 19o. Stamp Tax on Jai-alai, Horse Race Tickets, Lotto or Other
Authorized Numbers Games."
"SEC. 191. Stamp Tax On Bills of Lading or Receipts."
"SEC. 192. Stamp Tax on Proxies."
"SEC. 193. Stamp Tax on Powers of Attorney."
"SEC. 194. Stamp Tax on Leases and Other Hiring Agreements."
"SEC. 195. Stamp Tax on Mortgages, Pledges and Deeds of Trust."
"SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property."
Laws/Regulations on Financial Institutions 397
"SEC. 197. Stamp Tax on Charter Parties and Similar Instruments."
"SEC. 198. Stamp Tax on Assignments and Renewals of Certain
Instruments."
"SEC. 199. Documents and Papers Not Subject to Stamp Tax." (Amended)
SECTION 3. New Rate of DST on Original Issue of Shares of Stocks. —
"SEC. 174. Stamp Tax on Original Issue of Shares of Stock. — On every
original issue, whether on organization, reorganization or for any lawful purpose,
of shares of stock by any association, company or corporation, there shall be
collected a documentary stamp tax of One peso (Pi.00) on each Two hundred pesos
(P2oo), or fractional part thereof, of the par value, of such shares of stock: Provided,
that in case of the original issue of shares of stock without par value, the amount of
the documentary stamp tax herein prescribed shall be based upon the actual
consideration for the issuance of such shares of stock: Provided, further, That in
the case of stock dividends, on the actual value represented by each share."
Section 174 of the Code used to be Section 175. The rate of DST on the original
issue of shares of stock was revised from One peso and fifty centavos (P1.50) on
each Two hundred Pesos (P200) to "One peso (P1.00) on each Two hundred pesos
(Pax:)," or fractional part thereof, of the par value, of such shares of stock.
The DST under this Section is imposed on the privilege of issuing shares of stock.
The shares are considered issued upon the acquisition of the stockholder of the
attributes of ownership over the shares (the right to vote, the right to receive
dividends, the right to dispose, etc. notwithstanding that restrictions on the exercise
of any of these rights may be imposed by the Corporation's articles and/or by-
laws, the Securities and Exchange Commission, stockholder agreement, court order,
etc.), which acquisition of such attributes of ownership shall be manifested by the
acceptance by the Corporation of the stockholder's subscription to its shares of
stock. The entire shares of stock subscribed are considered issued for purposes of
the DST, even if not fully paid. The delivery of the certificates of stock to stockholders
is not essential for the DST to accrue.
In all cases where the issued shares are with par value, the basis of the DST shall be
the par value thereof. For shares of stock without par value, the basis shall be the
actual consideration for the shares of stock. However, in a case where shares of
stocks without par value are issued as stock dividends, the basis of the DST shall be
the actual value represented by each share.
398 Annex B
SECTION 4. New Rate of DST on Sales, Agreements to Sell, Memoranda of
Sales, and Subsequent Transfer of Shares of Stocks. —
"SEC. 175. Stamp tax on Sales, Agreements to Sell, Memoranda of Sales,
Deliveries or Transfer of Shares or Certificates of Stock. — On all sales, or
agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or
certificates of stock in any association, company, or corporation, or transfer of
such securities by assignment in blank, or by delivery, or by any paper or agreement,
or memorandum or other evidences of transfer or sale whether entitling the holder
in any manner to the benefit of such stock, or to secure the future payment of
money, or for the future transfer of any stock, there shall be collected a documentary
stamp tax of Seventy-five centavos (Po.75) on each Two hundred pesos (P2oo), or
fractional part thereof, of the par value of such stock: Provided, That only one tax
shall be collected on each sale or transfer of stock from one person to another,
regardless of whether or not a certificate of stock is issued, indorsed, or delivered
in pursuance of such sale or transfer: and Provided, further, That in case of stock
without par value the amount of the documentary stamp tax herein prescribed .
shall be equivalent to twenty-five percent (25%) of the documentary stamp tax
paid upon the original issue of said stock."
Section 175 of the Code used to be Section 176 with the old tax rate of DST applicable
on sales, agreements to sell, memoranda of sales, deliveries, or transfer of shares
or certificates of stock is now revised from One peso and fifty centavos (P1.5o) on
each Two hundred Pesos (P2oo) to "Seventy-five centavos (P0.75) on each Two
hundred pesos (P200)," or fractional part thereof, of the par value of such stock.
Likewise, the documents described as "due bills" and "certificates of obligation",
which were previously included in the old section, have been removed from the
coverage of this renumbered and amended Section.
All transfer of shares of stocks of a domestic corporation are subject to the DST
upon execution of the deed transferring ownership or rights thereto, or upon
delivery, assignment or indorsement of such shares in favor of another. No transfer
of shares of stock shall be recorded unless DST thereon has been duly paid for in
accordance with Section 201 of the Code.
For a sale or exchange to be taxable, there must be an actual or constructive transfer
of beneficial ownership of the shares of stock from one person to another. Such
transfer may be manifested by the clear exercise of attributes of ownership over
such stocks by the transferee, or by an actual entry of a change in the name appearing
in the certificate of stock or in the Stock and Transfer Book of the issuing corporation
Laws/Regulations on Financial Institutions 399
or by any entry indicating transfer of beneficial ownership in any form of registry
including those of a duly authorized scripless registry, such as those maintained
for or by the Philippine Stock Exchange. However, if by the transfer of certificates
of stock from a resigned trustee to a newly appointed trustee such certificate of
stock remain in the name of the cestui que trust or the resigned trustee so that the
new trustee is constituted as mere depository of the stock, such transfer is not
taxable. Provided, however, that transfer of shares to "nominees" to qualify them
to sit in the board or to qualify them to perform any act in relation to the corporation
shall not be subject to the DST provided herein only upon proof of a duly executed
Nominee Agreement showing the purpose of the transfer; that the transfer is without
consideration other than the undertaking of the nominee to only represent the
beneficial owner of the stock; and the transfer is in trust.
Agreements to sell shares of stock are also subject to DST. It is not only actual sales
or transfers that are taxable but also agreements to sell such stock or executory
contracts for the sale or transfer of shares of stock. However, if the DST has been
paid on the agreement to sell or memoranda of sale, the actual sale or transfer of
the stocks pursuant to the agreement will no longer be subject to DST.
SECTION 5. New Rate of DST on All Debt Instruments. —
"SEC. 179. Stamp Tax on All Debt Instruments. — On every original issue of
debt instruments, there shall collected a documentary stamp tax of One pesos
(P1.00) on each Two hundred pesos (P2oo), or fractional part thereof, of the issue
price of any such debt instrument: Provided, That for such debt instruments with
terms of less than one (1) year, the documentary stamp tax to be collected shall be
of a proportional amount in accordance with the ratio of its term in number of
days to three hundred sixty-five (365) days: Provided, further, That only one
documentary stamp tax shall be imposed on either loan agreement, or promissory
notes issued to secure such loan.
"For purposes of this section, the term debt instrument shall mean instruments
representing borrowing and lending transactions including but not limited to
debentures, certificates of indebtedness, due bills, bonds, loan agreements,
including those signed abroad wherein the object of contract is located or used in
the Philippines, instruments and securities issued by the government or any of its
instrumentalities, deposit substitute debt instrument, certificates or other evidences
of deposits that are either drawing interest significantly higher than the regular
savings deposit taking into consideration the size of the deposit and the risks
involved or drawing interest and having a specific maturity date, orders for payment
400 Annex 13
of any sum of money otherwise than at sight or on demand, promissory notes,
whether negotiable or non-negotiable, except bank notes issued for circulation."
Section 179 used to be Section 1.80 of the Code, and, as amended, it now covers all
instruments representing borrowing and lending transaction under a single
heading, i.e., "All Debt Instruments" and applying a new unitary tax rate thereon.
Consequently, "debentures and certificates of indebtedness" found in the former
Section 174 of the Code, and likewise "due bills and certificates of obligation" found
in the former Section 176 of the Code, have been incorporated in this renumbered
and amended Section.
"Debt Instrument" shall mean instruments representing borrowing and lending
transaction including but not limited to:
a.
b.
c.
d.
debentures,
certificates of indebtedness,
due bills,
bonds,
e. loan agreements, including those signed abroad wherein the object of the
contract is located or used in the Philippines,
f. instruments and securities issued by the government or any of its
instrumentalities,
B. deposit substitute debt instruments,
h. certificates or other evidences of deposits that are drawing instrument
significantly higher than the regular savings deposit taking into consideration the
size of the deposit and the risks involved,
i. certificates or other evidences of deposits that are drawing interest and
having a specific maturity date,
j. orders for payment of any sum of money otherwise than at sight or on
demand,
k. promissory notes, whether negotiable or non-negotiable, except bank notes
issued for circulation.
All such debt instruments are now subject to DST of "One peso (P1.00) on each
Two hundred pesos (P2oo)," or fractional part thereof, of the issue price of any
such debt instrument, from the previous varying rates of One peso and fifty centavos
(P1.50) on each Two hundred Pesos (P200) under then Section 174 and Section
176, or Thirty centavos (Po.3o) on each Two hundred pesos (P200) under then
Section 180. The term "issue price" as used herein shall refer to the face value of
the debt instrument.
Laws/Regulations on Financial Institutions 401
The DST on all debt instruments shall be imposed only on every original issue and
the tax shall be based on the issue price thereof. Hence, sale of a debt instrument
in the secondary market will not be subject to the DST.
If the debt instrument has a term of less than one (1) year, the DST due shall be
computed taking into consideration the number of days that the instrument is
outstanding as a fraction of 365 days.
Example: A promissory note in the amount of Pesos: One hundred thousand
(P100,000.00) is issued with a term of 90 days from issue date. The DST due is
One Hundred Twenty Three Pesos and Twenty Nine Centavos (P123.30) computed
as follows:
P100,000 / P200 = 500 x P 1.00 = P500.00 x 90/365 = P123.29 or P123.30
(rounded off to the nearest centavo)
If the debt instrument has a term of one year or longer, the DST due shall be
computed based on the issue price of the debt instrument.
of
Example: A promissory note is issued at a price of Pesos: One Hundred Thousand
(P100,000.00) with a term of two years. The DST due is Pesos: Five Hundred
(P5oo.00) computed as follows:
P100,000.00 / P200.00 = P500.00 X P1.00 = P500.00
As is the treatment prevailing before the effectivity of R.A. No. 9243, all certificates
or other evidences of deposit in banks drawing interest at such rate depending
upon the amount deposited and having a specific maturity date or where the interest
earned varies depending on the duration/term (number of days) of the deposit,
shall be subject to the DST provided herein, irrespective of the nomenclature and
whether covered by a certificate, passbook or any other evidence of deposit. Bank
deposits of any kind which provide interest higher than the rate given to a regular
savings/demand deposit account shall also be subject to the new rate of DST
imposed herein. The exceptions are ordinary demand and savings deposits which
are withdrawable upon demand by the depositor and earning rates of interest based
on prevailing market rates for a regular saving/demand deposit account, irrespective
of the amount deposited. The DST shall be due and payable upon the date such
deposit is made.
For purposes of determining whether a certificate or document evidencing deposits
is subject to DST imposed on debt instruments, the following rules shall apply:
402 Annex B
1. Any deposit bearing interest, irrespective of the nomenclature and whether
covered by a certificate, passbook or any other evidence of deposit, where the
interest is significantly higher than the rate given to regular savings deposits, shall
be subject to the new rate of DST imposed on debt instruments.
2. All type of deposit accounts with a higher interest yield than that given to
savings deposit or where the interest rate earned by such deposit is reduced upon
pre-termination, are likewise subject to the new rate of DST herein imposed.
3. All interest rate of a particular bank or financial institution shall be
considered as "significantly higher" if it is at least fifty percent (50%) higher than
the lowest interest rate given by that bank or financial institution on any of its
deposit, whether the same be savings/demand deposit. A regular savings/demand
deposit are those which are withdrawable upon demand by the depositor and is
earning rates of interest at the rate prevailing for a regular savings/demand deposit,
irrespective of the amount deposited.
4. Any deposit bearing interest, irrespective of the nomenclature and whether
covered by a certificate, passbook or any other evidence of deposit is considered to
be with a maturity date, and subject to DST as imposed upon debt instruments, if:
a. There is a predetermined or defined specific maturity or end date to the
deposit as agreed to by the depositor; or
b. Absent a specific maturity date, there is a defined program of enjoyment
of higher interest rate or enjoyment of a privilege or other benefit (either monetary
or in kind) to be extended by the bank or financial institution if the said deposit is
to be maintained by the depositor for a defined period of time.
SECTION 6. DST on Domestic Bills of Exchange or Drafts. —
"SEC. 180. Stamp Tax on All Bills of Exchange or Drafts. — On all bills of
exchange (between points within the Philippines) or drafts, there shall be collected
a documentary stamp tax of Thirty centavos (Po.3o) on each Two hundred pesos
(P2oo), or fractional part thereof, of the face value of any such bill of exchange or
draft."
This is intended to complement the DST imposed on "all foreign bills of exchange"
which are "drawn in but payable out of the Philippines" under Section 182 of the
Code.
Laws/Regulations on Financial Institutions 403
SECTION 7. New Documentary Stamp Tax Base for Life Insurance Policies.
"SEC. 183. Stamp Tax on Life Insurance Policies. — On all policies of
insurance or other instruments by whatever name the same may be called, whereby
any insurance shall be made or renewed upon any life or lives, there shall collected
a documentary stamp tax of Fifty centavos (Po.5o) on each Two Hundred pesos
(P20 o), or fractional part thereof, of the amount of premium collected."
Section 183 has been amended retaining the same DST rate of Fifty centavos (P0.50)
on each Two Hundred pesos (Pam) as before, but revising the tax base, from the
previous base of "amount insured by any such policy" to the new tax base of
"amount of premium collected."
The DST provided for in this section shall be assessed only on life insurance policies
that were issued on or after March 20, 2004, the day R.A. 9243 took effect. The
DST due on life insurance policy shall be due and collected every time there is an
insurance premium collection on such policy, including premiums paid/collected
beyond the year the policy was taken out. Insurance premium collection as used
herein shall include not only those premiums paid or remitted by the insured
directly, but shall also include premiums paid for by applying cash surrender value,
dividend earned, other modes of payment, whether on the original policy or
amendments thereto. However, life insurance policies issued before the enactment
of R.A. 9243 and included in the inventory required herein to be submitted shall
be covered by the provisions of the old Section 183, and DST shall not be collected
thereon as imposed in this amended Section if the DST due thereon as provided in
the old Section 183 has already been fully paid. Provided, however, any increase in
coverage from year to year or additional riders attached to existing policy shall be
deemed a new issuance, and premium relating thereto whether paid or remitted
by the insured directly, or by applying the cash surrender value or dividend earned
are subject to DST.
As a consequence of the change in the DST tax base for life insurance policies, all
insurance companies who are issuing life insurance policies shall submit in hard
and soft copy, an inventory of all issued, outstanding and valid life insurance policies
as of March 19, 2004, following the herein format.
404 Annex B
Name of Life Insurance Company
Summary of Outstanding and Valid Life Insurance Policies
As of March 19, 2004
Product Policy Date Name Annual Amount
Type * No. Issued Insured Premium Insured **
*Including description of existing riders
**Inclusive of the existing riders
The above mentioned listing of issued life insurance policies shall be submitted to
the Revenue District Office/Large Taxpayers Service/Large Taxpayers District
Office where the taxpayer is registered on or before January 31, 2005. The hard
copy of the above listing shall be made under oath as to the completeness, truth
and accuracy thereof by a duly authorized officer or representative of the taxpayer.
Failure to do so, or failure to submit the inventory required herein on the date
stated herein, would make said life insurance policies subject to DST based on
insurance premiums collected as imposed under the new law.
SECTION 8. New Stamp Tax Base and Rate for Policies of Annuities and Pre-
Need Plans. —
"SEC. 156. Stamp tax on Policies of Annuities and Pre-Need Plans. — On all
policies of annuities, or other instruments by whatever name the same may be
called whereby an annuity may be made, transferred or redeemed, there shall be
collected a documentary stamp tax of Fifty centavos (Po.5o) on each Two hundred
pesos (P2oo), or fractional part thereof, of the premium or installment payment or
contract price collected. On pre-need plans the documentary stamp tax shall be
Twenty centavos (P0.20) on each Two hundred pesos (P2oo), or fractional part
thereof, of the premium or contribution collected."
Section 186 has been amended changing the tax base and imposing a revised DST
rate on policies of annuities and pre-need plans. On policies of annuities, the old
tax base of "capital of the annuity" or "annual income" has been removed and in its
place, the tax is now based on the 'premium or installment payment or contract
price collected."
Laws/Regulations on Financial Institutions 405
The DST rate has likewise been reduced and simplified, from the previous "One
peso and fifty centavos (Pi.5o) on each Two hundred Pesos (P200), or fractional
part thereof, of the capital of the annuity, or should this be unknown, then on
each Two hundred pesos (P2oo) pesos, or fractional part thereof, of thirty three
and one third (33 1/3) times the annual income" to the new tax rate of "Fifty
centavos (P0.50) on each Two hundred pesos (P200)" or fractional part thereof,
of the premium or installment payment or contract price collected."
On pre-need plans, the DST is now based on the "premium or contribution
collected" in lieu of the previous "value or amount of the plan". Likewise, the rate
has been restated, from the previous Fifty centavos (P0.50) on each Five hundred
pesos (P500), to the new rate of "Twenty centavos (P0.20) on each Two Hundred
pesos (P200)" of the premium or contribution collected.
The DST provided for in this section shall be assessed only on annuities and pre-
need plans issued on or after March 20, 2004, the day R.A. 9243 took effect. The
DST due on such annuities and pre-need plans shall be due and collected every
time there is a premium collection on such annuities and pre-need plans, including
those premium paid/collected beyond the year the annuities and pre-need plans
were purchased. However, annuities and pre-need plans issued before the
enactment of R.A. 9243 and listed in the inventory required herein to be submitted
are subject to the rates and base specified under the old Section 186, and no DST
shall be due thereon as imposed in this section, if the DST due thereon as provided
for in the old Section 186 has already been fully paid.
As a consequence of the change in the DST tax base for annuities and pee need -
plans, all taxpayers issuing annuities and pre-need plans shall submit in hard and
soft copy an inventory of all issued, outstanding and valid life annuities and pre-
need plans as of March 19, 2004, following the herein format.
,
11


}
406 Annex B Laws/Regulations on Financial Institutions 407

Name of Taxpayer thereto, whether the proceedings be civil or criminal; papers and documents filed
Summary of Outstanding and Valid Annuities and Pre-Need Plans in courts by or for the national, provincial, city or municipal governments; affidavits
As of March 19, 2004 of poor persons for the purpose of proving poverty; statements and other
compulsory information required of persons or corporations by the rules and
regulations of the national, provincial, city or municipal governments exclusively

I1 for statistical purposes and which are wholly for the use of the bureau or office in
Product Rilicy Date Name Annual Amount
Type * No. Issued Insured Premium Insured "* which they are filed, and not at the instance or for the use or benefit of the person
filing them; certified copies and other certificates placed upon documents,
instruments and papers for the national, provincial, city or municipal governments,
made at the instance and for the sole use of some other branch of the national,
provincial, city or municipal governments; and certificates of the assessed value of
lands, not exceeding Two hundred pesos (P2oo) in value assessed, furnished by
* Including description of existing riders
the provincial; city or municipal Treasurer to applicants for registration of title to
** Inclusive of the existing riders
land.

The above mentioned listing of issued annuities and pre-need plans shall be (c) Borrowing and lending of securities executed under the Securities
submitted to the Revenue District Office/Large Taxpayers Service/Large Taxpayers Borrowing and Lending Program of a registered exchange, or in accordance the
District Office where the taxpayer is registered on or before January 31, 2005. The regulations prescribed by the appropriate regulatory authority: Provided, however,
harcLcopy of-the above listing shall be made under oath as to the completeness, That any borrowing or lending of securities agreement as contemplated hereof shall
truth and accuracy thereof by a duly authorized officers or representative of the be duly-covered by-a mastersecurities-borrowing- andiending-agreementacceptable
taxpayer. Failure to do so, or failure to submit the listings required in this section to the appropriate regulatory authority, and which agreement is duly registered
with the time required herein would make said annuities and pre-need plans subject and approved by the Bureau of Internal Revenue (BIR).
to DST based on premium collected as imposed under the new law.
(d) Loan agreements or promissory notes, the aggregate of which does not
SECTION 9. Documents and Papers not Subject to DST . — exceed Two hundred fifty thousand pesos (P250,000), or any such amount as may
be determined by the Secretary of Finance, executed by an individual for his
Documents and Papers Not Subject to Stamp Tax. — The provisions purchase on installment for his personal use or that of his family and not for business

1 1
"SEC. 199.
of Section 173 to the contrary notwithstanding, the following instruments,
documents and papers shall be exempt from the DST:
(a) Policies of insurance or annuities made or granted by a fraternal or
beneficiary society, order, association or cooperative company, operated on the
lodge system or local cooperation plan and organized and conducted solely by the
members thereof for the exclusive benefit of each member and not for profit.
or resale, barter or hire of a house, lot, motor vehicle, appliance or furniture:
Provided, however, That the amount to be set by the Secretary of Finance shall be
in accordance with a relevant price index but not to exceed ten percent (10%) of
the current amount and shall remain in force at least for three (3) years.
(e) Sale, barter or exchange of shares of stock listed and traded through the
local stock exchange for a period of five (5) years from the effectivity of this Act.

Certificates of oaths administered to any government official in his official
(b)
capacity or of acknowledgment by any government official in the performance of
his official duties, written appearance in any courts by any government official, in
his official capacity; certificates of the administration of oaths to any person as to
the authenticity of any paper required to be filed in court by any person or party
(f) Assignment or transfer of any mortgage, lease or policy of insurance, or
the renewal or continuance of any agreement, contract, charter, or any evidence
obligation or indebtedness, if there is no change in the maturity date or remaining
period of coverage from that of the original instrument.
408 Annex B
(g) Fixed income and other securities traded in the secondary market or
through an exchange.
(h) Derivatives: Provided, That for purposes of this exemption, repurchase
agreements and reverse repurchase agreements shall be treated similarly as
derivatives.
(i) Interbranch or interdepartmental advances within the same legal entity.
(i) All forebearances arising from sales or service contracts including credit
card and trade receivables: Provided, That the exemption be limited to those
executed by the seller or service provider itself.
(k) Bank deposit accounts without a fixed term or maturity.
(1) All contracts, deeds, documents and transactions related to the conduct of
business of the Bangko Sentral ng Pilipinas.
(m) Transfer of property pursuant to Section 4o(C)(2) of the National Internal
Revenue Code of 1997, as amended.
(n) Interbank call loans with maturity of not more than seven (7) days to cover
deficiency in reserves against deposit liabilities, including those between or among
banks and quasi-banks."
Section 199 has been amended to clearly identify what documents and instruments
are not subject to DST. Items (c) to (n), except item (d) which was part of then
Section 18o and incorporated in this amended Section, are new.
For clarity and to avoid confusion, Section 199(g) of the Code, as amended, shall
refer exclusively to debt instruments.
Derivatives exempted from DST under Section 199(h) of the Code, as amended,
shall refer only to those derivatives issued by entities duly licensed by the Bangko
Sentra] ng Pilipinas (BSP) to issue and trade in derivatives, and whose issuance is
duly authorized by the Bangko Sentral ng Pilipinas (BSP).
The exemption for bank deposit accounts without a fixed term or maturity provided
under Section 199(k) of the Code, as amended, shall apply only to deposit account
which does not qualify under the provisions of Section 5 of these Regulations.
Laws/Regulations on Financial Institutions 409
The exemption on transfer of property pursuant to Section 40(c)(2) of the National
Internal Revenue Code of 1997, as amended, provided for under Section 199(m)
refers to the DST due on the deed transferring the property. However, the shares
of stocks issued in exchange for said property is subject to the DST due under
Sections 174 if they are original issues.
For clarity and to avoid confusion, for interbank call loans with maturity of not
more than seven (7) days, including those between or among banks and quasi-
banks, the same must have been made strictly to cover deficiency in reserves against
deposit liabilities for the same to be exempted from DST as provided for in Section
199(n) of the Code as amended.
SECTION 10. Applicability of the DST law on Electronic Documents. —
The DST rates as imposed under the Code, as amended by R.A. 9243 shall be
applicable on all documents not otherwise expressly exempted by the said law,
notwithstanding the fact that they are in electronic form. As provided for by R.A.
8792, otherwise known as the Electronic Commerce Act, electronic documents are
the functional equivalent of a written document under existing laws, and the
issuance thereof is therefore tantamount to the issuance of a written document,
and therefore subject to DST.
SECTION 11. Repealing Clause. —
All existing rules and regulations or parts thereof, which are inconsistent with the
provisions of these regulations, are hereby repealed, amended or modified
accordingly.
SECTION 12. Effectivity. —
These regulations shall apply to all transactions made or to documents/instruments
executed or issued as of March 20, 2004, the date when R.A. No. 9243 took effect.
(SGD.) JUANITA D. AMATONG
Secretary of Finance
Recommending Approval:
(SGD.) GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue
 II
I
410 Annex B
I
REVENUE MEMORANDUM CIRCULAR NO. 04-03
Clarifying Items that would Constitute Gross Receipts and Costs in Determining
"Gross Income" on Services for the Purpose of Computing the Minimum Corporate
Income Tax (MCIT) Pursuant to Sections 27(E) and 28(A)(2) of the National
Internal Revenue Code of 1997
TO All Internal Revenue Officers and Other Concerned
I This Circular is hereby issued to clarify what items should comprise gross receipts
and corresponding cost of services for purposes of computing the gross income
on sale of services which shall be the basis of the 2% Minimum Corporate Income
Tax (MCIT) imposed under Section 27(E) and Section 28(A)(2) of the National
Internal Revenue Code (NIRC) of 1997.
Gross Receipts and Cost of Services Per Industry. — For purposes of applying the
MCIT, the 'gross receipts' and 'cost of services' of taxpayers engaged in the following
types of services, or any other kind but of a similar nature, shall be determined as
follows:
(i) Banks and non-bank financial intermediaries performing quasi-banking
activities pursuant to Sec. 22(V), (W), and (X) of the NIRC of 1997. Their gross
receipts shall mean actual or constructive receipts from interests, commissions,
and discounts from lending activities, and all other items treated as gross income
under Section 32 of the NIRC of 1997 that are not subject to final withholding
income tax. Their cost of services shall refer to those incurred directly and
exclusively for the following activities:
1. Lending/investment of funds;
2. Obtaining of funds from the public through the receipt of deposits; and,
3. Trading of foreign exchange and other financial instruments.
and shall be limited to the following:
1. Salaries, wages and other employee benefits of personnel directly engaged
in any of the said activities;
2. Interest expense except interest charged by or paid to the head office on
funds considered/classified as assigned capital of the branch;
3. PDIC premium payments; and,
4. BSP supervision fee.
Laws/Regulations on Financial Institutions 411
Insurance and pension funding companies refer to those engaged in life
and non-life insurance business as defined under the Insurance Code and pre-
need companies, including health maintenance organizations. Their gross receipts
shall mean actual or constructive receipts representing: net retained premiums
(gross premiums net of returns, cancellations, and premiums ceded)/gross
premium or collection from planholders; membership fees (in the case of HMOs);
miscellaneous income; investment income not subject to final tax; released reserve
and, in the case of pre-need companies, gross withdrawals from the trust funds set
up independently as mandated by the Securities and Exchange Commission (SEC);
and, all other items treated as gross income under Section 32 of the Tax Code.
Their costs of services shall refer to those incurred directly and exclusively in the
insurance and pre-need business, including the generation of investment income
not subject to final taxes, and shall be limited to the following:
1. Salaries, wages and other employee benefits of personnel directly engaged
in said activities;
2. Commissions on direct writings/agents of pre-need companies;
3. Claims, losses, maturities and benefits net of reinsurance recoveries; and,
4. Net additions required by law to reserve fund (for insurance companies)
and in the case of pre-need companies, contributions to the trust funds to be set up
independently as mandated by the SEC.
(iii) Finance companies and other financial intermediaries not performing
quasi-banking activities refer to those engaged in the business of extending credit
facilities to consumers and to industrial, commercial, or agricultural enterprises,
including lending investors. Their gross receipts shall mean actual or constructive
receipts representing interests, discounts, and all other items treated as gross
income under Section 32 of the NIRC of 1997 that are not subject to final
withholding income tax. Their costs of services shall refer to those incurred directly
and exclusively in their lending, financing and generating of investment income
not subject to final taxes, and shall be limited to the following:
1. Salaries, wages and other employee benefits of personnel directly doing
such functions; and,
2. Interest expense.
(iv) Brokers of securities (excluding banks). Their gross receipts shall mean
actual or constructive receipts for engaging in the business of effecting transactions
in securities for the account of others. Their costs of services shall refer to those
412 Annex B
incurred directly and exclusively for such activity, and shall be limited to the
following:
1. Salaries, wages and other employee benefits of personnel directly engaged
in said activities;
2. Philippine Stock Exchange (PSE) terminal fees;
3. Communication charges related to trading/sales of securities;
4. Research fees such as access to Bloomberg and Reuters stock data;
5. Commissions paid to its agents who are not employees of the brokerage
firm; and,
o6. Settlement/processing costs of trades, commonly known as "exchange
dues."
(v) Customs, insurance, real estate, immigration and commercial brokers.
Their gross receipts shall mean actual or constructive receipts in the form of
brokerage fees, commissions and remuneration as such broker. Their costs of
services shall refer to those incurred directly and exclusively for brokering activities,
and shall be limited to the following:
oi. Salaries, wages and other employee benefits of personnel directly engaged
in brokering activities; and,
02. Commissions paid to its agents who are not employees of the brokerage
firm.
(vi) General engineering and/or building contractors refer to those engaged in
contracting business in connection with fixed works requiring specialized
engineering knowledge and skill (e.g. reclamation works, railroads, highways,
streets roads, tunnels, airports), or with any structure built, for the support, shelter
and enclosure of persons, animals, chattels, or movable property of any kind,
requiring in its construction the use of more than two unrelated building trades or
crafts, or to do or superintend the whole or any part thereto (e.g. sewers and
sewerage, disposal plants and systems, parks, playgrounds, refineries). Their gross
receipts shall mean actual or constructive receipts representing the contract price,
including the amount charged for materials supplied with the services. Their costs
of services shall refer to those incurred directly and exclusively for such activities,
and shall be limited to the following:
Cost of materials used in construction;
02. Salaries, wages and other employee benefits of site laborers and
supervisors;
Laws/Regulations on Financial Institutions 413
03. Health insurance, workers compensation and general liability insurance
of site laborers and supervisors;
• Fees and costs paid to sub-contractors;
5. Costs of performance bonds on the particular contract;
6. Depreciation/amortization, rentals, repairs and maintenance of equipment
'directly used in the said activities;
• Costs of moving equipment and materials to and from the contract site;
8. Costs of design and technical assistance; and,
9. Supplies and tools directly used in the said activities
(vii) Common carriers or transportation contractors. Their gross receipts shall
mean actual or constructive receipts for engaging in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public, including transportation contracting (e.g.
operation of public utility buses, jeepneys, taxi-cabs and cars-for-rent). Their costs
of services shall refer to those incurred directly and exclusively for such activities,
and shall be limited to the following:
1. Salaries, wages and other employee benefits of personnel directly engaged
in the operation of the transportation equipment;
2. Toll fees (representing rental for the use of road);
3. Parking fees (for aircraft, sea craft and motor vehicles),
4. Franchise fees (representing rental for the use of road network);
5. Depreciation/amortization, rentals, repairs and maintenance of:
• Transportation equipment, and
• Properties, building and improvements exclusively used as parking for
aircrafts, sea crafts or motor vehicles;
o6. Fuel and lubricants of motor vehicles, aircraft or sea craft directly used in
transporting passengers and/or goods/cargoes;
07. Meals provided to passengers;
o8. Cost of safety paraphernalia and other supplies for use by passengers (e.g.
lifejacket, mask, etc.); and,
09. Annual transportation equipment registration fee. THcaDA
(viii) Hotel, motel, rest/pension/lodging house and resort operators. Their gross
receipts shall mean actual or constructive receipts derived from the operation of
such hotel, motel, rest/pension/lodging house, resort and other similar places. Their
costs of services shall refer to those incurred directly and exclusively for providing
rooms and other related facilities (e.g. hotel premises, kitchen, restaurants,
recreational facilities, other spaces used by customers, but should not include office
414 Annex B Laws/Regulations on Financial Institutions 415

premises of administrative staff) for the enjoyment of customers, and shall be

limited to the following:
or. Salaries, wages and other employee benefits of housekeeping staff,
concierge personnel and other hotel/house/resort attendants;
2. Depreciation/amortization, rentals, repairs and maintenance of building,
properties and facilities, and equipment directly used in the said activities;
3. Commissions paid to travel agents for bookings of guests for such
establishments;
4. In case the operator also serves food and beverage, its direct costs shall
include those allowed to food service establishments; and,
5. Supplies (e.g. hotel room/housekeeping, kitchen and laundry).
(ix) Food service establishments. Their gross receipts shall mean actual or
constructive receipts derived from the operation of such restaurant, bars, cafes,
clubs, caterers, other eating/drinking-places, as well as take-out counters. Their
costs of services shall refer to those incurred directly and exclusively in the
preparation and serving/selling of foods and drinks and other requirements of the
customers, and shall be limited to the following:
(xi) Telephone and telegraph, electric, gas, and water utilities. Their gross
receipts shall mean actual or constructive receipts derived from the operation of
such systems/utilities covered by the law granting the franchise. Their costs of
services shall refer to those incurred directly and exclusively for the production
and delivery of such systems/utilities, and shall be limited to the following:
or. Salaries, wages and other employee benefits of personnel directly engaged
in the said activities;
2. Depreciation/amortization, rentals, repairs and maintenance of properties
and equipment directly used in the said activities (i.e., water pipes, electric poles,
antennas, etc.);
3. Interconnection fee and/or share of foreign telecommunications
administration (FA) for the services they perform;
4. Fuel and lubricants on vehicles or equipment directly utilized in the said
activities;
5. Amortization of franchise or development fees;
6. Franchise fees; and,
7. Royalties.

or. Cost of raw/cooked foods and drinks prepared and served/sold; (xii) Radio and/or television broadcasting. Their gross receipts shall mean actual
2. Salaries, wages and other employee benefits of personnel directly engaged or constructive receipts derived from the operation of such radio/television
in the said activities; broadcasting covered by the law granting the franchise. Their costs of services shall
3. Depreciation/amortization, rentals, repairs and maintenance of properties, refer to those incurred directly and exclusively for such production and
buildings, furniture and fixtures, and equipment directly used in the performance broadcasting, and shall be limited to the following:
of said activities;
4. Cost of cooking oil, condiments and other ingredients used in cooking the or. Fees of talents hired for production/broadcasting;
food; and, 2. Salaries, wages and other employee benefits of production and broadcasting
5. Royalties paid by franchisee. personnel;
3. Tapes and other production materials & supplies;
(x) Lessors of property. Those engaged in the business of leasing out properties, 4. Satellite charges & wire services;
such as real properties, equipment, and other movable properties. Their gross 5. Film rights royalties & dubbing expenses;
receipts shall mean actual or constructive receipts derived from such lease of 6. Set requirements;
properties. Their costs of services shall refer to those incurred directly and 7. Rentals for production equipment & facilities;
exclusively for the property leased, and shall be limited to the depreciation/ 8. Rentals for locations used exclusively for production/broadcasting;
amortization, rentals, real property taxes/charges, and repairs and maintenance, AECcTS
of the properties being leased, as well as salaries of employees and fees of contractors 9. Costumes, props & prizes; and,
hired to provide maintenance (repairs, cleaning/maintenance of leased properties) 10. Depreciation on production and broadcasting equipment.
and collection services.
416 Annex B Laws and Issuances 417

The term 'salaries, wages and other employee benefits' as used herein shall include
me following employee benefits: bonuses, Pag-ibig, SSS, Medicare, and HDMF
Contributions. If a cost or expenditure is incurred both directly to provide a service
ANNEX C
required by a client, and indirectly for administration, operation, or sales-promotion Laws and Issuances
purposes, the taxpayer shall be allowed a ratable portion of such cost or expenditure
to form part of the "Cost of Services."
All internal revenue officers and employees are hereby enjoined to give this Circular
as wide a publicity as possible.

BANGKO SENTRAL NG PILIPINAS (BSP) ISSUANCES

(SGD.) GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue
BSP Circular No. 313 Allowance for Probable Losses (December 27, 2001)
BSP Circular No. 471 Rules and Regulations Governing the Registration and
Operations of Foreign Exchange Dealers/Money Changers and Remittance
Agents (January 24, 2005)

BSP Circular No. 472 Regulations Governing Banks and All Financial Institutions
Under the Regulation and Supervision of the Bangko Sentral Ng Filipinas
(February 1, 2005)

BSP Manual of Accounts

BSP Manual of Regulations for Banks (Updated as of December 2004)

BSP Manual of Regulations for Non-Bank Financial Institutions (Updated as of

December 2004)

BSP Memorandum to All Banks Performing Trust, Other Fiduciary Business and
Investment Management Activities (January 3, 2000)

MB Resolution No. 1748 Amending Part IV (Trust, Other Fiduciary Business

and Investment Management Activities) of the Manual of Regulations For
Banks (December io, 1999)
418 Annex C Laws and Issuances 419

BATAS PAMBANSA (BP) RMC 13-96 Clarification of Issues Affecting Dealers in Securities and Lending
Investors Under Republic Act No. 7716, Otherwise Known as the "Expanded
BP 68 The Corporation Code of the Philippines (May 1, 198o) VAT Law" (January 15, 1996)

RMC 56-02 Taxability of Health Maintenance Organizations for VAT Purposes

(December 13, 2002)
BIR BANK BULLETIN (BB)
RMC 04-03 Clarifying Items that would Constitute Gross Receipts and Costs in
BB 2004-01 Implements Republic Act No. 9238- the T reversion from VAT Determining "Gross Income" on Services for the Purpose of Computing the
System of Taxation to GRT (February 10, 2004) Minimum Corporate Income Tax Pursuant to Sections 27(E) and 28(A)(2) of
the National Internal Revenue Code of 1997 (December 31, 2002)

RMC 62-03 Providing Guidelines for Documentary Stamp Tax Evaluation on Cash-
BIR REVENUE MEMORANDUM CIRCULAR (RMC) Settled Securities Swap Transactions under the Memorandum of Agreement
for Cash-Settled Securities Swap Transactions among the Bangko Sentral ng
Pilipinas, Bureau of Treasury, Bankers Association of the Philippines and
RMC 55-8o Publishing Section 24(b)(2)(b) of the National Internal Revenue Code, Investment Houses Association of the Philippines (n.d.$)
as amended by Presidential Decree No. 1705 (December 3, 1980)
RMC 76-03 Tax Exemptions of Nonstock, Nonprofit Corporations Section 3o, Tax
RMC 45-86 Tax exemption of the (i) Government Service Insurance System and Code of 1997 and Nonstock, Nonprofit Educational Institutions under
(ii) Social Security System under Presidential Memorandum Order No. 42 dated Paragraph 3, Section 4, Article XIV of the Constitution (November 14, 2003)
September 25, 1986 (December 5, 1986)
RMC 72-04 Clarification of Issues on the Additional Transactions Subject to
RMC 43-91 Clarification of Revenue Memorandum Circular Nos. 15-91 and 34-91 Creditable Withholding Tax under Revenue Regulations No. 17-2003 (RR 17-
and Revenue Audit Memorandum Order No. 2-91 (May 2, 1991) 2003), as amended by RR 30-2003, RR 1-2004 and RR 3-2004 (November 16,
2004)
RMC 48-91 Publishing the provisions of Articles 61 and 62 of Republic Act No.
6938, otherwise known as the "Cooperative Code of the Philippines,"
prescribing the extent of the tax exemption of ooperatives and providing the
guidelines for the availment thereof (June 18, 1991) BIR REVENUE MEMORANDUM ORDER (RMO)

RMC 47-92 Clarification on the effect of the Resolution of the Court of Appeals in
the case of Commissioner of Internal Revenue v. Hon. Andres B. Reyes, etc., RMO 15-91 Liability of Pawnshops to the 5% Lending Investor's tax (March 11,
and Josefina Leal, CA-G.R. SP No. 28824, promulgated on September 22, 1992 1 991)
on the investigation and assessments by this Office of the lending investor's
tax against pawnshops (October 15, 1992) RMO 83-98 Procedures in the Implementation of an Automated Database for
Documentary Stamps Metering Machine with Encryption (October 16, 1998)
RMC 11-96 Clarification of Issues Affecting Non-life Insurance Components, under
Republic Act No. 7716, Otherwise Known as the "Expanded VAT Law" (January
15, 1996)
420 Annex C
BIR REVENUE REGULATIONS (RR)
RR 10-76 Regulations Governing Taxation of Offshore Banks and Foreign
Currency Deposit Units of Depository Banks (December 14, 1976)
RR 17-84 Income Taxation of Interest Income Derived from Deposits and Yield
from Deposit Substitutes (October 12, 1984)
RR 19-86 Taxation of Leases (November 10, 1986)
RR 16-93 Republic Act No. 7353, otherwise known as the Rural Banks Act of 1992,
providing for the Creation, Organization and Operation of Rural Banks and
For Other Purposes (April 22, 1993)
RR 07-95 Consolidated Value-Added Tax Regulations (December 9, 1995)
RR o2-98 Implementing Republic Act No. 8424, "An Act Amending the National
Internal Revenue Code, as Amended" Relative to the Withholding on Income
Subject to the Expanded Withholding Tax and Final Withholding Tax,
Withholding of Income Tax on Compensation, Withholding of Creditable Value-
Added Tax and Other Percentage Taxes (April 17, 1998)
RR o3-98 Implementing Section 33 of the National Internal Revenue Code, as
Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe
Benefits (May 21, 1998)
RR 09-98 Implementing Republic Act No. 8424, "An Act Amending the National
Internal Revenue Code, as Amended," Relative to the Imposition of the
Minimum Corporate Income Tax on Domestic Corporations and Resident
Foreign Corporations (August 25, 1998)
RR 10-98 Implementing the Provisions of the National Internal Revenue Code, as
Amended by Republic Act No. 8424, Relative to the Imposition of Income Taxes
on Income Derived Under the Foreign Currency Deposit and Offshore Banking
Systems (August 25, 1998)
RR 05-99 Implementing Section 34(E) of the Tax Code of 1997 on the
Requirements for Deductibility of Bad Debts from Gross Income (March 10,
1 999)
Laws and Issuances 421
RR o9-0o Mode of Payment and/or Remittance of the Documentary Stamp Tax
(DST) Under Certain Conditions (August 31, 2000)
RR 02-01 Implementing the Provision on Improperly Accumulated Earnings Tax
Under Section 29 of the Tax Code of 1997 (February 12, 2001)
RR 06-01Amending Pertinent Provisions of Revenue Regulations Nos. 1-98, 2-98,
as Amended, and 7-95, as Amended, and Revenue Memorandum Circular No.
1-98 Relative to the Inclusion of Additional Taxpayers to be Subject to Final
Withholding Tax, Revision of the Withholding Tax Rates on Certain Income
Payments Subject to Creditable Withholding Tax, Time for the Filing of Various
Tax Returns and Payment of the Taxes Due Thereon and Others (July 31, 2001)
RR 15-o1 Revised Regulations on the Manner of Purchase and Affixture or Payment
of Documentary Stamp Tax on Documents/Facilities Evidencing Taxable
Transactions (October 16, 2001)
RR 20-01 Regulations Implementing Articles 61 and 62 of Republic Act No. 6938,
Otherwise Known as the "Cooperative Code of the Philippines," in Relation to
R.A. Nos. 7716, 8241 and 8424, Thereby Amending Revenue Memorandum
Circular No. 48-91 (November 12, 2001)
RR 20-02 Clarifying the Tax Treatment of Income Earned from Unregistered
Activities by Enterprises Registered Under the Bases Conversion and
Development Act of 1992 and the Philippine Economic Zone Act of 1995
(October 14, 2002)
RR 25-02 Amending Revenue Regulations No. 5-99, Further Implementing Section
34(E) of the Tax Code of 1997 on the Requirements for Deductibility of Bad
Debts from Gross Income (November 19, 2002)
RR 26-02 Amending Further Revenue Regulations No. 9-2001, as Amended by
Revenue Regulations No. 2-2002 and Revenue Regulations No, 9-2002,
Providing for the Staggered Filing of Returns of Taxpayers Enrolled in the
Electronic Filing and Payment System Based on Industry Classification
(December 5, 2002)
RR 07-03 Providing the Guidelines in Determining Whether a Particular Real
Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1)
of the National Internal Revenue Code of 1997 for Purposes of Imposing the
f 1
422 Annex C
Capital Gains Tax Under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the
Ordinary Income Tax Under Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and
28(B)(1), or the Minimum Corporate Income Tax Under Sections 27(E) and
28(A)(2) of the Same Code (December 27, 2002)
RR 17-03 Amending Further Pertinent Provisions of Revenue Regulations No. 0 2-
98, as Amended, Providing for Additional Transactions Subject to Creditable
Withholding Tax; Re-establishing the Policy that the Capital Gains Tax on the
Sale, Exchange or Other Disposition of Real Property Classified as Capital
Assets Shall be Collected as a Final Withholding Tax, Thereby Further
Amending Revenue Regulations Nos. 8-98 and 13-99, as Amended by Revenue
Regulations No. 14-2000; and for Other Purposes (March 31, 2003)
RR 05-04 Amending Further Revenue Regulations (RR) No. 9-2001, as Amended
by RR No. 2-2002, RR No. 9-2002 and RR No. 26-2002, Providing for
Additional Tax Returns/Forms Which Shall be Filed thru the Electronic Filing
and Payment System, Revising the Requirements for Enrollment of Taxpayers,
and Expanding the Coverage Thereof to Include the Top io,000 Private
Corporations Duly Identified Under RR No. 17-2003 (April 26, 2004)
RR 09-04 Implementing Certain Provisions of Republic Act No. 9238, Re-imposing
the Gross Receipts Tax on Banks and Non-Bank Financial Intermediaries
Performing Quasi-Banking Functions and Other Non-Bank Financial
Intermediaries Beginning January 1, 2004 (June 21, 2004)
RR 10-04 To Further Implement the Provisions of Sec. 4 of Republic Act No. 9238
Re-imposing the Gross Receipts Tax on other Non-bank Financial
Intermediaries Beginning January 1, 2004 and Hereby Amending for the
Purpose Sec. 4 of Revenue Regulations No. 9-2004 by Including Pawnshops
Under the Classification of Other Non-bank Financial Intermediaries (October
18, 2004)
RR 13-04 Implementing the Provisions of Republic Act No. 9243, An Act
Rationalizing the Provisions on the Documentary Stamp Tax of the National
Internal Revenue Code of 1997, as Amended, and for Other Purposes
(December 23, 2004)
RR 04-05 Rules and Regulations Implementing Bangko Sentral ng Pilipinas
Circular No. 472 Series 2005 Section 1 Requiring all Bank Borrowers and Co-
Laws and Issuances 423
makers to Submit Latest Income Tax Return, and Financial Statement Received
by BIR ( February 16, 2005)
RR 16-05 Consolidated Value-Added Tax Regulations of 2005 (September 1,
2005)
BIR RULINGS
095-85 Tax treatment of non-trusteed retirement plans (June 24, 1985)
092-86 Clarification on the tax treatment of trusteed and non-trusteed
retirement plans (June 24, 1986)
261-86 Tax treatment of interest income from Philippine currency bank deposits
of SSS (November 26, 1986)
115-87 Tax treatment of dividends received by NSSLAs (April 24, 1987)
349-87 Treatment of seat in the Manila Stock Exchange for tax purposes (November
5, 1987)
371-87 Exemption of SSS/GSIS from 20% final withholding tax on interest income
from Philippine currency bank deposits (November 19, 1987)
261-89 Tax treatment of gains realized by a nonresident foreign corporation from
its sale of shares of stock in a domestic corporation under RP-Singapore tax
treaty (December 15, 1989)
116-90 Deductibility of retirement contributions under Deposit Administration
Contract (DAC) (June o8, 1990)
151-90 Tax treatment of credit card companies (August 16, 1990)
123-91 Tax treatment of income of cooperatives arising from interest on bank
deposits and raffle draw winnings (June 26, 1991)
424 Annex C
002-93 Tax treatment of gains realized by a nonresident foreign corporation from
its sale of shares of stock in a domestic corporation under RP-Sweden tax treaty
(January 13, 1993)
135-94 Tax treatment of gains realized by a nonresident individual from his sale of
shares of stock in a domestic corporation under RP-US tax treaty (September
1, 1994)
076-95 VAT on foreign exchange dealers (April 19, 1995)
115-95 Tax treatment of interest on reinsurance premiums under RP-France tax
treaty (July 24, 1995)
177 -95 Timing and recognition of tax on government securities (November 9,
1995)
007-96 Tax treatment of gains realized by a nonresident foreign corporation
from its sale of shares of stock in a domestic corporation under RP-Japan
tax treaty (January 18, 1996)
037-96 Tax treatment of gains realized by a nonresident foreign corporation
from its sale of shares of stock in a domestic corporation under RP-Malaysia
tax treaty (March 7, 1996)
099-97 Tax treatment of gains from sale of membership seat in the PSE by a
nonresident foreign corporation under RP-Malaysia tax treaty (August 29,
1997)
042-98 Exemption of SSS from payment of capital gains tax on the sale of its land
(April 13, 1998)
103 -98 Treatment of sale of ROPOA by the PNB for tax purposes (June 29, 1998)
139-98 Tax treatment of gains from alienation of shares of stock listed and traded
through the local stock exchange under tax treaties (September 28, 1998)
151-98 Treatment of membership seat in the PSE for tax purposes (October 19,
1998)
002-99 Exclusion from gross income of optional GSIS and Pag-IBIG contributions
(January 12, 1999)
Laws and Issuances 425
099-99 Creditable withholding tax rate applicable on sale of real property by DBP
(July 9, 1999)
063-0o Interest income from long-term deposit in the form of common trust fund
(November 20, 2000)
017-01 Exemption from income tax of sale of the foreclosed properties by AFP
Savings and Loan Association, Inc. (May 9, 2001)
030-01 Clarification on the tax treatment of long-term trust accounts (July 24,
2001)
050-01 Tax treatment of sale of USD T-bills (October 29, 2001)
052-01 Tax treatment of sale of USD indexed Philippine peso notes (November 16,
2001)
026-02 Tax treatment of zero-coupon bonds issued by HGC (June 27, 2002)
002-03 Exemption from tax of mutual building and loan associations guaranteed
by HGC under RA 8763 (February 12, 2003)
007-04 Government debt instruments and securities as deposit substitutes
irrespective of the number of lenders at the time of origination (July 16, 2004)
003-05 Clarification on the tax treatment of interest income from trust funds (July
22, 2005)
oo8-o5 Exception to the rule that government debts instruments are deposit
substitutes irrespective of the number of lenders at the time of origination on
the proposed issuance of treasury notes to NFA (July 28, 2005)
010-o5 Payment of capital gains tax on foreclosure sale of homestead or free patent
lands under RA 270 (Rural Bank Act), as amended (August 2, 2005)
DA-141-98 Exemption of NSSLAs from 20% final withholding tax on interest income
from bank deposits and deposit substitutes (April 16, 1998)
426 Annex C
DA-246-98 Applicability of interest expense limitation on government banks
(June 17, 1998)
DA-562-98 Exemption of science foundations from 2o% final withholding tax on
interest income from bank deposits and deposit substitutes (December 9,
1998)
DA-o09-99 Tax consequence of transfer by a credit cooperative of its land in favor
of individual member-beneficiaries (January 7, 1999)
DA-o97-99 DST on import transactions (February 15, 1999)
DA-144-o1 Clarification on the tax treatment of long-term capital market
instruments (August 30, 2001)
DA-o12-o2 Compliance requirement for income tax exemption of long-term deposit
or trust instruments (January 30, 2002)
DA-o64-02 Tax treatment of long-term common trust funds (April 3, 2002)
DA-166-02 Exemption of SSS from capital gains tax on sale of its real estate holding
acquired assets (September 17, 2002)
DA-209-02 Sale by Pag-IBIG Fund of its acquired assets to its members/qualified
buyers (November 15, 2002)
DA-132-o3 Exemption from tax of employees' trust on interest income derived
from its money placements in bank deposits, deposit substitutes, trust funds
and/or similar or like arrangements/investments (April 28, 2003)
DA-400-03 Clarification on the tax exemption of home mutual building and loan
associations guaranteed by the HGC (November 6, 2003)
DA-446-o3 DST on transfer of assets to stockholders in the form of liquidating
dividends (December 5, 2003)
DA-453-o3 Correct basis for computing capital gains tax and creditable withholding
tax in dacion en pago transactions (December 5, 2003)
Laws and Issuances 427
DA-104-04 Clarification on the applicable creditable withholding tax interest
income payments made to banks by one of the top ten thousand corporations
(March 8, 2004)
DA-124-04 Tax treatment of gains realized by banks on their FCDU transactions,
from the sale, exchange or retirement of bonds, debentures or other certificate
of indebtedness with a maturity of more than five years (March 22, 2004)
DA-161-04 Classification and tax treatment of notes issued by banks to not more
than 19 institutional investors (April 5, 2004)
DA-183-o4 Period of coverage of tax exemption of rural banks under RA 7353 (April
6, 2004)
DA-201-04 Creditable withholding tax on interest payments made by top ten
thousand corporations for their trustee (April 12, 2004)
DA-315-04 Applicability of interest expense limitation on interest expense incurred
by a bank on its deposits solicited to carry out its purpose of converting it to a
rural bank (June 8, 2004)
DA-321-04 Withholding tax obligation of trustee banks on disbursement of
retirement/separation benefits (June ii, 2004)
DA-388-04 Qualification of retirement plans to be established through a pre-need
company (July 20, 2004)
DA-490-04 Tax consequence of sale of land by a bank, in its capacity as investment
manager of employees' retirement plan (September 14, 2004)
DA-491-04 Clarification on the classification and tax treatment of fixed rate
promissory note issued by the Republic of the Philippines in favor of a single
investor (September 13, 2004)
DA-533-04 VAT on rental corporation considered as an ordinary service company
engaged in operating lease of various real and personal properties (October
25, 2004)
DA-595-04 Request for change in accounting method from Rule of 78 method to
the interest on annuity method (November 23, 2004)
428 Annex C
DA-665-o4 GRT on interest and other fees collected and received by the Home
Development Mutual Fund (Pag-IBIG Fund) from loans (December 23, 2004)
DA-288-o5 DST on insurance policies issued abroad (June 27, 2005)
DA-027-06 VAT base for pre-need companies (January 31, 2006)
ITAD 159-03 Tax treatment of income derived by a domestic bank and nonresident
foreign corporation from financial derivative transactions 159-03 (October 20,
2003)
UN-17o-95 GRT on credit card companies (April 19, 1995)
VAT 026-96 VAT base for pre-need companies (September 23, 1996)
VAT 018-98 Taxability of pre-need health care plans (June 23, 1998)
VAT 025-99 VAT on local purchase of goods by SSS (March 15, 1999)
VAT 040-99 Recognition of input VAT on advance payment for repair of vessel
(April 8, 1999)
VAT 006-01 Clarification on the VAT base for non-life insurance companies
(February 16, 2001)
VAT 062-01 VAT on sale of service by BSP to SSS (September 21, 2001)
VAT 072-02 VAT on payment of reinsurance premiums (October 22, 2002)
VAT 028-04 Exemption from VAT of SSS on interest payments received from
borrowers under its various lending programs through accredited participating
financial institutions/banks (October 20, 2004)
Laws and Issuances 429
BUREAU OF LOCAL GOVERNMENT FINANCE (BLGF) OPINIONS
BLGF Opinion (June 17, 1997) RPT on real properties owned by SSS occupied/
tenanted for dwelling purposes by private persons for consideration
BLGF Opinion (October 5, 1998) RPT on real properties owned by Land Bank of
the Philippines (LBP)
BLGF Opinion (July 31, 2003) Exemption of GSIS from real property tax
BLGF Opinion (September 11, 2003) LBT on health insurance companies
BLGF Opinion (November 7, 2003) RPT on real properties owned by SSS occupied/
tenanted for dwelling purposes by private persons for consideration
CONSTITUTION
1987 Philippine Constitution, Article XII, Section 20
COMMONWEALTH ACT (CA)
CA 186 An Act to Create and Establish a "Government Service Insurance System,"
to Provide for its Administration, and to Appropriate the Necessary Funds
Therefor (November 14, 1936)
CA 466 An Act to Revise, Amend and Codify the Internal Revenue Laws of the
Philippines (June 15, 1939)
CA 523 An Act to Amend Section Two Hundred and Fifty-Five of the National
Internal Revenue Code (May 10, 1940)
430 Annex C
DEPARTMENT OF HEALTH (DOH) ORDER
DOH Administrative Order No. 34, series of 1994 (July 20, 1994) Rules and
Regulations on the Supervision of Health Maintenance Organizations
DEPARTMENT OF JUSTICE (DOJ) OPINIONS
DOJ Opinion No. 46 (September 17, 2001) Whether the Bangko Sentral ng Pilipinas
or the Securities and Exchange Commission Should Assume Jurisdiction to
Regulate the Operation of the "Lending Investors" (Direct Lending)
DOJ Opinion No. 165, series of 1994 (December 16, 1994) Reiterating that GSIS
Continues to be Legally Exempt From the Payment of All Taxes, Assessments,
Fees, Charges or Duties of All Kinds Under the Provisions of Section 33 of the
Revised GSIS Charter, as Amended
DEPARTMENT OF FINANCE (DOF) -
LOCAL FINANCE CIRCULARS
Local Finance Circular No. 1-93 Prescribing The Guidelines Governing the Power
of Municipalities and Cities to Impose a Business Tax on Banks and Other
Banking Institutions Pursuant to Sections 143(f) and 151 of Republic Act No.
7160 of 1991, and its Implementing Rules and Regulations (June 16, 1993)
Local Finance Circular No. 2-93 Prescribing the Guidelines Governing the Power
of Municipalities and Cities to Impose a Business Tax on Insurance Companies
Pursuant to Sections 143(f) and 151 of Republic Act No. 7160 of 1991, and its
Implementing Rules and Regulations (June 16, 1993)
Local Finance Circular No. 3-93 Prescribing the Guidelines Governing the Power
of Municipalities and Cities to Impose a Business Tax on Financing Companies
Pursuant to Sections 143(f) and 151 of Republic Act No. 7160 of 1991, and its
Implementing Rules and Regulations (June 16, 1993)
Laws and Issuances 431
EXECUTIVE ORDER (EO)
Eo 93 Withdrawing All Tax and Duty Incentives, Subject to Certain Exceptions,
Expanding the Powers of the Fiscal Incentives Review Board and for Other
Purposes (December 17, 1986)
EO 273 Adopting a Value-Added Tax, Amending for This Purpose Certain Provisions
of the National Internal Revenue Code, and for Other Purposes (July 25, 1987)
PRESIDENTIAL DECREE (PD)
PD 114 Regulating the Establishment and Operation of Pawnshops (January 29,
1 973)
PD 129 Governing the Establishment, Operation and Regulation of Investment
Houses (February 15, 1973)
PD 312 Further Amending the Charter of the Philippine National Bank (October
18,1973)
PD 612 Ordaining and Instituting an Insurance Code of the Philippines (December
10, 1974)
PD 694 Providing for the 1975 Revised Charter of the Philippine National Bank
(May 8, 1975)
PD 739 Amending Section Two Hundred Fifty-Five and Three Hundred Fifty-Eight
of the National Internal Revenue Code (July 1, 1975)
PD 1034 Authorizing the Establishment of an Offshore Banking System in the
Philippines (September 3o, 1976)
PD 1035 Expanding the Authority of Certain Depository Banks Under R.A. No.
6426 and for Other Purposes (September 3o, 1976)
PD 1158 A Decree to Consolidate and Codify All the Internal Revenue Laws of the
Philippines (June 3, 1977)

432 Annex C
PD 1185 Fire Code of the Philippines (August 26, 1977)
PD 1246 Further Amending Certain Provisions of Republic Act Numbered Sixty-
Four Hundred and Twenty-Six, as Amended by Presidential Decree Numbered
One Thousand Thirty-Five (November 21, 1977)
PD 1460 A Decree to Consolidate and Codify All the Insurance Laws of the
Philippines (June ii, 1978)
PD 1461 Further Amending Certain Provisions of Republic Act No. 85, as Amended,
Otherwise Known as the DBP Charter (June 11, 1978)
PD 1467 Creating the "Philippine Crop Insurance Corporation" Prescribing Its
Powers and Activities, Providing for Its Capitalization and for the Required
Government Premium Subsidy, and for Other Purposes (June 11, 1978)
PD 1530 Instituting a System of Voluntary Contributions for Housing Purposes
(June 11, 1978)
PD 1688 Authorizing Banks to Invest in the Equity of Venture Capital Corporations
Organized to Assist Small and Medium-scale Enterprises (April 3, 1980)
PD 1931 Directing the Rationalization of Duty and Tax Exemption Privileges
Granted to Government-Owned or -Controlled Corporations and All Other
Units of Government (June 11, 1984)
PD 1959 Amending Certain Sections of the National Internal Revenue Code, as
Amended (October 10, 1984)
PD 1994 Further Amending Certain Provisions of the National Internal Revenue
Code (November 5, 1985)
B.16 REPUBLIC ACTS (RA)
RA 39 An Act Amending or Repealing Certain Sections of Titles V and Viii of the
National Internal Revenue Code (October 1, 1946)
Laws and Issuances 433
RA 85 An Act Creating the Rehabilitation Finance Corporation (October 29, 1946)
RA 265 An Act Establishing the Central Bank of the Philippines, Defining Its Powers
In the Administration of the Monetary and Banking System, Amending the
Pertinent Provisions of the Administrative Code With Respect to the Currency
and the Bureau of Banking, and for Other Purposes (June 15, 1948)
RA 337 An Act Regulating Banks and Banking Institutions and for Other Purposes
(July 24, 1948)
RA 58o An Act to Create the Home Financing Commission, to Stimulate Home
Building and Land Ownership and to Promote the Development of Land for
That Purpose, Provide Liberal Financing Through an Insured Mortgage System,
and Develop Thrift Through the Accumulation of Savings in Insured Institutions
(September 15, 1980)
RA 716 An Act Amending Section Two Hundred Fifty-Five of Commonwealth Act
Numbered Four Hundred and Sixty-Six, Otherwise Known as the National
Internal Revenue Code, as Amended (June 6, 1952)
RA 720 An Act Providing for the Creation, Organization and Operation of Rural
Banks, and for Other Purposes (June 6, 1952)
RA 1161 An Act to Create a Social Security System Providing Sickness,
Unemployment, Retirement, Disability and Death Benefits for Employees (June
18, 1954)
RA 1300 An Act Revising the Charter of the Philippine National Bank (June 16,
1955)
RA 1405 An Act Prohibiting Disclosure of, or Inquiry Into, Deposits With Any
Banking Institution and Providing Penalty Therefor (September 9, 1955)
RA 1504 An Act to Amend Certain Sections of Commonwealth Act Numbered Four
Hundred and Sixty-Six, Otherwise Known as the National Internal Revenue
Code, as Amended (June 16, 1956)
RA 2081 An Act to Amend Republic Act Numbered Eighty-Five and Other Pertinent
Laws, to Provide Facilities for Intermediate and Long-Term Credit by
Converting the Rehabilitation Finance Corporation Into the Development Bank
434 Annex C
of the Philippines, Authorizing the Said Bank to Aid in the Establishment of
Provincial and City Private Development Banks, and for Other Purposes (June
14, 1958)
RA 2629 Investment Company Act (June 18, 196o)
RA 3844 An Act to Ordain the Agricultural Land Reform Code and to Institute
Land Reforms in the Philippines, Including the Abolition of Tenancy and the
Channeling of Capital Into Industry, Provide for the Necessary Implementing
Agencies, Appropriate Funds Therefor and for Other Purposes (August 8, 1963)
RA 3591 An Act Establishing the Philippine Deposit Insurance Corporation,
Defining Its Powers and Duties and for Other Purposes (June 22, 1963)
RA 598o An Act Regulating the Organization and Operation of Financing
Companies (August 4, 1969)
RA 6426 An Act Instituting a Foreign Currency Deposit System in the Philippines,
and for Other Purposes (April 4, 1972)
RA 6848 An Act Providing for the 1989 Charter of the Al-Amanah Islamic
Investment Bank of the Philippines, Authorizing Its Conduct of Islamic Banking
Business, and Repealing for This Purpose Presidential Decree Numbered Two
Hundred and Sixty-Four as Amended by Presidential Decree Numbered Five
Hundred and Forty-Two (Creating The Philippine Amanah Bank) (January
26, 199o)
RA 6938 An Act to Ordain a Cooperative Code of the Philippines (March 10, 199o)
RA 7160 An Act Providing for a Local Government Code of 1991 (October 10,
1991)
RA 7353 An Act Providing for the Creation, Organization and Operation of Rural
Banks, and for Other Purposes (April 2, 1992)
RA 7653 The New Central Bank Act (June 14, 1993)
RA 7716 An Act Restructuring the Value-Added Tax (VAT) System, Widening Its
Tax Base and Enhancing Its Administration, and for These Purposes Amending
and Repealing the Relevant Provisions of the National Internal Revenue Code,
as Amended, and for Other Purposes (May 5, 1994)
Laws and Issuances 435
RA 7717 An Act Imposing a Tax on the Sale, Barter or Exchange of Shares of Stock
Listed and Traded Through the Local Stock Exchange or Through Initial Public
Offering, Amending for the Purpose the National Internal Revenue Code, as
Amended, by Inserting a New Section and Repealing Certain Subsections
Thereof (May 5, 1994)
RA 7906 An Act Providing for the Regulation of the Organization and Operations
of Thrift Banks, and for Other Purposes (February 23, 1995)
RA 8241 An Act Amending Republic Act No. 7716, Otherwise Known. as the
Expanded Value-Added Tax Law and Other Pertinent Provisions of the National
Internal Revenue Code, as Amended (December 20, 1996)
RA 8282 An Act Further Strengthening the Social Security System Thereby
Amending for This Purpose Republic Act No. 1161, as Amended, Otherwise
Known as the Social Security Law (May 1, 1997)
RA 8291 An Act Amending Presidential Decree No. 1146, as Amended, Expanding
and Increasing the Coverage and Benefits of the Government Service Insurance
System, Instituting Reforms Therein and for Other Purposes (May 3o, 1997)
RA 8366 An Act Liberalizing the Philippine Investment House Industry, Amending
Certain Sections of Presidential Decree No. 129, as Amended, Otherwise Known
as the Investment Houses Law (October 21, 1997)
RA 8367 An Act Providing for the Regulation of the Organization and Operation
of Non-stock Savings and Loan Associations (October 21, 1997)
RA 8424 An Act Amending the National Internal Revenue Code, as Amended,
and for Other Purposes (December ii, 1997)
RA 8556 An Act Amending Republic Act No. 598o, as Amended, Otherwise Known
as the Financing Company Act (February 26, 1998)
RA 8761 An Act Imposing the Value-Added Tax on Certain Services Beginning
January 1, 2001, Amending for the Purpose Section 5 of Republic Act No. 8424
and for Other Purposes (February 15, 2000)
RA 8763 An Act Consolidating and Amending Republic Act Nos. 58o, 1 557, 5488,
and 7835 and Executive Order Nos. 535 and 9o, as They Apply to the Home
436 Annex C
Insurance and Guaranty Corporation Which Shall Be Renamed as Home
Guaranty Corporation, and for Other Purposes (March 7, 2000)
RA 8791 An Act Providing for the Regulation of the Organization and Operations
of Banks, Quasi-banks, Trust Entities and for Other Purposes (May 23,
2000)
RA 8799 The Securities Regulation Code (July 19, 2000)
RA 9010 An Act to Further Defer the Imposition of the Value-Added Tax on Certain
Services, Amending for the Purpose Section 5 of Republic Act No. 8424, as
Amended By Republic Act No. 8761
RA 916o An Act Defining the Crime of Money Laundering, Providing Penalties
Therefor and for Other Purposes (September 29, 2001)
RA 9165 An Act Instituting the Comprehensive Dangerous Drugs Act of 2002,
Repealing Republic Act No. 6425, Otherwise Known as the Dangerous Drugs
Act of 1972, as Amended, Providing Funds Therefor, and for Other Purposes
(June 7, 2002)
RA 9182 An Act Granting Tax Exemptions and Fee Privileges to Special Purpose
Vehicles Which Acquire or Invest in Non-performing Assets, Setting the
Regulatory Framework Therefor, and for Other Purposes (December 23, 2002)
RA 9194 An Act Amending Republic Act No. 9160, Otherwise Known as the "Anti-
Money Laundering Act of 2001" (March 7, 2003)
RA 9238 An Act Amending Certain Sections of the National Internal Revenue Code
of 1997, as Amended, by Excluding Several Services From the Coverage of the
Value-Added Tax and Re-imposing the Gross Receipts Tax on Banks and Non-
bank Financial Intermediaries Performing Quasi-banking Functions and Other
Non-bank Financial Intermediaries Beginning January 1, 2004 (February 5,
2004)
RA 9243 An Act Rationalizing the Provisions on the Documentary Stamp Tax of
the National Internal Revenue Code of 1997, as Amended, and for Other
Purposes (February 17, 2004)
Laws and Issuances 437
;1
RA 9267 An Act Providing the Regulatory Framework for Securitization and
Granting for the Purpose Exemptions From the Operation of Certain Laws
(March 19, 2004)
RA 9294 An Act Restoring the Tax Exemption of Offshore Banking Units (OBUs)
and Foreign Currency Deposit Units (FCDUs), Amending for the Purpose
Section 27(D) And Section 28, Paragraphs (A)(4) And (A)(7)(B) of the National
Internal Revenue Code as Amended (April 28, 2004)
RA 9302 An Act Amending Republic Act Numbered Three Thousand Five Hundred
Ninety-One, as Amended, Otherwise Known as the "Charter of the Philippine
Deposit Insurance Corporation," and For Other Purposes (June 27, 2004)
RA 9337. An Act Amending Sections 27, 28, 34, 106, 107, io8, 109, no, 111, 112,
113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the National Internal
Revenue Code of 1997, as Amended, and for Other Purposes (May 24, 2005)
SECURITIES EXCHANGE COMMISSION (SEC) ISSUANCES
SEC Amended Implementing Rules and Regulations of the Securities Regulation
Code (December 3o, 2003)
SEC Memorandum Circular No. 13, series of 2001 (September 16, 2001)
SEC New Rules on the Registration and Sale of Pre-Need Plans Under Section 16
of the Securities Regulation Code (August 16, 2001)
SEC Omnibus Rules and Regulations for Investment Houses and Universal Banks
Registered as Underwriters of Securities (July 23, 2002)
SEC Rules and Regulations Governing Investment Companies pursuant to RA,
No. 2629 (October 31, 1989)
 References 439
438 Annex C

ANNEX D
References

Black, H. (1968). Black's law dictionary (4" ed.). Minnesota: West Publishing.
BusinessWorld: Special Report on the Insurance Industry. (2004, December).
Business World, pp. 23-24.

Carlton Press. (n.d.). Panama's secrecy laws. Retrieved September 12, 2005, from
Carlton Press Web site: http://www.offshore-manual.com/
Pa namania nSecrets.html

Commodity Futures Trading Commission's Office of External Affairs. (2005, July).

A guide to the language of the futures industry. Retrieved July 4, 2005,
from the Commodity Futures Trading Commission Web site: http://
www.cftc.gov/opa/glossary/ooaglossary a.htm

Contingency Analysis. (1996). Repurchase agreement. Retrieved July 12, 2005,

from Risk Glossary Web site: http://riskglossarv.com/
Del Castillo, C. (2005). Concept paper on the feasibility of replacing current flat
tax on corporations with graduated income tax rates. NTRC Tax Research
Journal, VIII, 15-21.

Financial Policy Forum - Derivatives Study Center and Financial Express. (2002).
Derivatives primer. Retrieved August 9, 2004, from htto: //
www.financialpolicy.org

Fitch, T. (2000). Dictionary of banking terms (4" ed.). New York: Barron's
Educational Series.
Marshall, J., & Bansal, V. (1992). Financing engineering: A complete guide to
financial innovation. New York: New York Institute of Finance.
440 Annex D
Mogan, W., & Gardner, L. (Eds.). (1973). The McGraw Hill dictionary of modern
economics: A handbook of terms and organizations. (2nd ed.). New York:
McGraw-Hill Book Company.
Nakar, R. (n.d.). Issues of taxation in derivatives. Retrieved August 8, 2004, from
Financial Policy Forum - Derivatives Study Center Web site: http://
www.financialpolicv.or g
R. (1989). The insurance code of the Philippines, annotated. Philippines:
Central Lawbook Publishing.
Saldafia, C. (1997). Principles of managerial finance: A financial analysis
approach. Philippines: AFA Publications.
Salvosa, F. S. II. (2006, April 11). Oversight body questions BIR-PDIC compromise.
Business World, p. S1/7.
Securities and Exchange Commission Annual Report. (2004). Working to
strengthen Philippine capital market institutions. Philippines: Securities
and Exchange Commission.
Securities and Exchange Commission. (April 2004). Blueprint on the capital market
development plan, Accelerating development in the NBFI sector and
expanded contribution to the Philippine economy 2004-2006 (Chap. 9,
pp. 5-6). Philippines: Securities and Exchange Commission.
Sjandeini, S. R. (2002). Recent developments in bank secrecy and money
laundering. Retrieved September 26, 2005, from Indonesian Business on
the Web site: http://articles.ibonweb.com/magarticle.asp?num=1028
Trivedi, A., & Hasan, S.M. (2000). Treasury operations and risk management.
Murnbai: Genesis Publishers.
Court Cases 441
ANNEX E
Court Cases
Caltex (Philippines), Inc. v. Commissioner of Internal Revenue, CTA Case No.
5664 (October 4, 2000)
Cebu Mabuhay Pawnshop, Inc. v. Commissioner of Internal Revenue, CTA
Case No. 6266 (March 25, 2004)
Cebu Mabuhay Pawnshop, Inc. v. Commissioner of Internal Revenue, CTA EB
No. 20 on CPA Case No. 6266 (February 02, 2005)
China Banking Corporation v. Court of Appeals, Court of Tax Appeals, and
Commissioner of Internal Revenue, G.R. No. 146749 (June ro, 2003)
Commissioner of Internal Revenue v. Antam Pawnshop Corporation, CA G.R.
SP No. 79117 (January 21, 2005)
Commissioner of Internal Revenue v. China Banking Corporation, G.R. No.
147938 (June 10, 2003)
Commissioner of Internal Revenue v. Insular Life Assurance Company, Ltd.,
CA-G.R. SP No. 46516 (September 29, 1998)
Commissioner of Internal Revenue v. Philippine American Accident Insurance
Co., et. al., G.R. No. 141658 (March 18, 2005)
Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc.,
CA-G.R. SP No. 70479 (August 16, 2004)
Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance
Company, Inc. and the Court of Appeals, G.R. No. 119176 (March 19, 2002)
442 Annex E Court Cases 443

Commissioner of Internal Revenue v. Michel J. Lhuillier, Pawnshop, Inc., CA Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,
G.R. SP No. 62463 (November 20, 2001) CTA Case No. 6166 (April 05, 2002)

Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., CA Philippine Home Assurance Corporation, et. al. v. Court of Tax Appeals and
G.R. SP No. 67667 (June 29, 2004) Commissioner of Internal Revenue, CA-G.R. SP No. 32531 (April 27, 1994)

Commissioner of Internal Revenue v. Lhu illier Pawnshop, Inc., G.R. Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue,
No. 15 0 947 (July 15, 2003) CTA Case No. 6201 (December 15, 2004)

Commissioner of Internal Revenue, v. Solidbank Corporation, G.R. No. 148191 Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue,
(November. 25, 2003) CTA EB No. 83 on CTA Case No. 6201 (July 27, 2005)

Commissioner of Internal Revenue v. Sun Life Assurance Company of Canada, State vs. Bean 159 Me 455, 195 A2d 68 (1963), quoted in Maceda v. Macaraig,
CA-G.R. No. 69125 (January 23, 2003) G.R. No. 88291 (June 8, 1993)

Deustehe Bank AG, Manila Branch v. Commissioner of Internal Revenue, CTA

Case No. 6566 (May 17, 2005)

Development Bank of the Philippines v. Court of Appeals, 96 SCRA 342

(February 28, 1980)

Easton Credit Corporation v. Securities Exchange Commission, CA S.P. No.

77974 (October 27, 2005)

Ferry v. Campbell, no Iowa 290, 81 N.W. 604

ING Bank, N.V. Manila Branch v. Commissioner of Internal Revenue, CTA EB

No. 52 on CTA Case No. 6187 (April 5, 2005)

Malayan Insurance Co., Inc. v. Commissioner of Internal Revenue, CTA Case

No. 6243 (December 16, 2002)

Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, CTA

Case No. 5690 (December 13, 2000)

Philamcare Health Systems, Inc. v. Court of Appeals and Julita Trinos, G.R.
No. 125678 (March 18, 2002)
 Index 445

INDEX

5-year holding period:

for long-term deposits and securities, 34-36, 39-40
requirement for ITF, CTF and IMA, 54-55
20-lender rule, 32-33

accrual method versus actual, 112-114

Al-Amanah Islamic Investment Bank, 18, 160

asset-backed securities (ABS), 62

authorized/accredited agent bank (AAB), 314

financial institutions as, 337

bad debts, 6
BSP certificate of worthlessness, 22-23
deductibility of loan loss provisions, 23
rules for deductibility, 21-22

Bangko Sentral ng Pilipinas, see BSP

banks:
Al-Amanah Islamic Investment Bank, 18,160
allowable deductions of, see deductions
as statutory taxpayer of DST, 139-140
as supervised by BSP, 319, table 329
 446 Index Index 447

bonds, 40-48 bonds:

branch profit remittance tax and, 85-88 definition of, 4o
BSP certificate of worthlessness, 22-23 discounted, 41-43
BSP monitoring requirements for long-term deposits, 56 dollar-denominated, 41, 80-82
classification of, 15-19 government securities or, 44-47
cooperative, 17-18, 144-152 interest-bearing, 41-43
definition of, 15 tax-free covenant, 47-48
deposit substitute, 29-33 types of income from, 41
derivatives, 59-60, 133-134 zero-coupon, 41-44, 254
Development Bank of the Philippines (DBP), 159, 294, 318, 321
DST on, 118-140, table 119 branch profit remittance tax (BPRT):
gross receipts tax (GRT) on, 98-117 on foreign banks, 85-86
interbank call loans (IBCL) and, 48-50 on HMOs, 222
Land Bank of the Philippines (LBP), 158-159, 294, 315, 318 on investment houses, 258
liberalization of business of, 343 on OBUs and FCDUs, 86-88
loan loss provisions of, 23
local, 63 BSP (Bangko Sentral ng Pilipinas), 317-320
local business tax (LBT) on, 293-299, 301-302 and SEC dual supervision over
long-term deposits, 33 35
- NBFIs, 323
MCIT on, 26-28 subsidiaries or affiliates of banks, 323
Philippine National Bank (PNB), 160 universal banks, 322-323
regular banking unit: background and function, 319-320
allocation of expenses, 85 certificate of worthlessness, 22-23
income tax on, 20-21 monitoring requirements for long-term deposits, 56
repurchase agreements, 48-50, 134
reverse repurchase agreements, 49-50, 134 building and loan association (BLA):
ROPOA, sale of, 28-29 as supervised by HGC, 325, table 33o
rural, 17, 140-143 nature of operations, 152-153
separate filing of returns for FCDUs, 316 taxation of, 154-155
taxation of, versus insurance companies, 212-213
taxation of income from ITF, CTF, IMA, 52 Bureau of Internal Revenue, see BIR
thrift, 16-17, 143-144
under Large Taxpayers Service (LTS), 336
withholding tax obligations of: C
on income payments subject to CWT, 96-97
on income payments subject to FWT, 89-93 capital asset, definition of, io
Bank Secrecy Law, 340 -341 capital gains tax (CGT), 141, 143,15o
provisions in foreign jurisdictions, 341-342 on sale of shares of stock, 275-277
bills of exchange, DST on, 128-129 cash-settled securities swap transactions (CSST):
definition of, 3o
BIR (Bureau of Internal Revenue), 336-338 DST on, 263
448 Index Index 449

closed and completed transaction, 6o, 115 CWT (creditable withholding tax):
obligations of:
close-end investment company, 266-267 banks, 96-97
insurance companies, 180-183
commercial banks: on commissions of insurance agents and brokers, 182-183
definition of, 16 on lease payments, 244-245
on payments made/earned by credit card companies, 250-251
commissions: on premiums paid by TTC, 184-185
of insurance agents and brokers, 182-1836 on sale of ROPOA by banks, 29
VAT on insurance and reinsurance, 200
D
common trust fund (CTF), 269
definition of, 50-51 dacion en pogo, 61, 159
income of the bank from, taxation of, 52
taxation of income, 52-55 DBP (Development Bank of the Philippines), 159, 294, 318, 321
withholding tax obligation, 57-58
debt instruments:
cooperative banks: definition of, 120
as supervised by CDA, 318, 325-326 table 33o DST on, 121-128
definition of, 17-18 computation of, 121-122
nature of business, 144 -145
taxation of, 145-147 deductions:
tax exemption coverage, 147 -151 allowable deductions from gross income, 6
bad debts, requirements for deductibility of, 21
Cooperative Development Authority (CDA) BSP certificate of worthlessness, 22
as regulatory agency of cooperative banks, 318, 325-326 ceilings on, 6
interest, 23-26
credit card companies:
as supervised by BSP, table 332 Department of Finance (DOF), 318
DST on, 252
gross receipts tax on, 251 Department of Health (DOH), 318
income tax and other taxes, 249-250 as regulatory agency of HMOs, 328
nature of business, 247 -249
withholding tax: deposit substitute:
obligations, zso 20-lender rule, 32-33
on income received by, 250-251 definition of, 29
public, definition of, 32
credit cooperatives: taxation of, 3o-32
as supervised by CDA, table 330
nature of business, 144 derivatives:
taxation of, 145-147 definition and examples of, 59
tax exemption coverage, 147-151 exemption from DST, 133-134
tax treatment of gains and losses, 59-60
creditable withholding tax, see CWT
 450 Index Index 451

Development Bank of the Philippines (DBP), see DBP GRT liability on offshore income, 116-117
income of nonresidents from transactions with, 77
documentary stamp tax, see DST proof of nonresidency, 78-79
liability to DST, 137-138
dollar-denominated FCDU treasury notes, 81-82 restoration of tax exemption of, 71-72, 82-84
separate filing of return for, 316
DST (documentary stamp tax): tax on onshore income, 75-77
banks as statutory payors of, 139-140 taxes covered by exemption, 74 -75
exemption of GSIS and SSS from, 226-228 versus FCDU, 63-65, 72-73
exemption of purely cooperative companies from, 195-196
nature of, 14 eFPS (electronic filing and payment system), 303, 314
on banks, 118-140
on bills of exchange, 128-129
on cash-settled securities swap transactions (CSST), 263 F
on credit card companies, 252
on debt instruments, 120-124 FCDU (foreign currency deposit unit):
on documents and transactions, 131-137, table 119 allocation of expenses, 85
1 on electronic documents, 265 background on taxation of, 65-71
on FCDUs and OBUs, 137-138 branch profit remittance tax on, 85-86
on financial lease arrangements, 247 definition of, 18, 63
on financing companies, 239 GRT liability on offshore income, 116-117
on foreclosures and sales or conveyances of ROPOA, 130 liability to DST, 137-138
on HMO membership agreement, 224-225 separate filing of return for, 316
on insurance policies, 205-211, table 205-206 treasury notes, 81
on investment companies, 270-271 versus OBU, 18
on investment houses, 258, 261-265, table 261-262 versus EFCDU, 63-65, 72-73
on mortgages and pledges, 129
on pawnshops, 284, 287-288 final withholding tax (FWT):
on pre-need plans, 221 exemption of GSIS and SSS from, 226-227
on securities brokers and dealers, 274 obligations of banks, 89-96
on special savings deposit account (SSA), 124-128 on deposit substitutes, 30-31
PSE as statutory payor of, 281 on passive income, rate of, 9-10
use of metering machines, 138-139
finance company:
E activities of, 233
definition of, 231-232
effectively connected income, 86, 179 DST on, 239
exemption from IAET, 237
EFCDU (expanded foreign currency deposit unit): GRT on, 237-239
allocation of expenses, 85 local business tax (LBT) on, 296, 300, 302
background on taxation of, 65-71 MCIT on, 235-236
branch profit remittance tax on, 86-88 regular income tax on, 234-235
definition of, 63 types of, 233-234, 240-252, see also finance leasing companies and credit card
exemption of offshore income, 73 companies
452 Index Index 453
withholding tax obligations, 236
without QB function as supervised by SEC, table 332
with QB function as supervised by BSP, table 332
finance leasing companies:
GRT on, 245-246
income tax and other taxes, 242
interest component on rental income, 242-243
nature of business, 24o-241
Financial Action Task Force (FATF), 340
financial institutions:
allowable deductions of, 6, see also deductions
as AAB, 337
as withholding agent, 337-338
business taxes on, 10- 14
DST (documentary stamp tax) on, 14, 337-338
eFPS, 303, 314
filing and payment of returns:
certificates, table 313
CGT, table 312
creditable withholding tax, table 308
DST, table 312
final withholding tax, table 306-307
fringe benefits tax, table 310
IAET, table 305
income tax, table 305
percentage tax, table 311
VAT, table 310
venue for, 314
withholding tax on compensation, table 309
withholding VAT, table 309
GRT (gross receipts tax) on, 11 , 335
historical development of, 11-12
IAET (improperly accumulated earnings tax), 9
local taxes on, 14
MCIT (minimum corporate income tax), 7-8
passive income of, tax on, 9-10
premium tax on, 13
regular income tax on, 5-7
regulation and supervision, 317-328
taxable income of, 5
VAT (value-added tax) on, 13, 335
issues on implementation of, 11-12
financial lease:
arrangements, DST on, 247
CWT on lease payments, 244-245
definition of, 240
exemptions granted to lessees, 243-244
fire tax, 211
foreclosure sales:
of ROPOA, DST on, 130
redemption period, 143
foreign bank, 19
branch profit remittance tax (BPRT), 85-86
foreign currency deposit unit, see FCDU
foreign exchange dealers, see money changers
forward contract, 59
futures contract, 59
G
Government Service Insurance System, see GSIS
gross receipts tax, see GRT
GRT (gross receipts tax), 344, 346
accrual method versus actual, 112-114
based on net trading gains, 107-111
cumulative reporting of net gains, illus. 109-110
gross receipts,
definition of, 104-107
inclusive of tax withheld, 115-116
effect of pretermination of instrument, 100-102, illus. 101-10 2
exemption of GSIS and SSS from, 227
nature of, 11
on banks, 98-117
on credit card companies, 251
on finance leasing companies, 245-246
on financial institutions, 11-12
454 Index Index 455

on financing companies, 237-239 I

on holding companies as financial intermediaries, 291
on investment companies, 270 IAET (improperly accumulated earnings tax), 88-89
on investment houses, 258, 260-261 exemption of financing companies, 237
on money changers, 289 exemption of pawnshops, 285
on net gains from ROPOA, 111-112 general exemption of financial institutions from, 9
on non-lending income, 102-104 nature of, 9
on OBU and FCDU transactions, 116-117 on HMOs, 18o, 222
on pawnshops, 285-287 on insurance companies, 180
rates of, 98-100 on investment companies, 270
versus local business tax (LBT), 298 on investment houses, 259
versus premium tax, 212 on lending investors, 292
on pre-need, 217
GSIS (Government Service Insurance System), 166, 318 on securities brokers and dealers, 272
as financial intermediary, 229 rate of, 9
exclusion from gross income:
of benefits, 228 individual trust fund (ITF), 269-270
of contributions, 228-229 definition of, 51
tax exemption of, 225-228 income of the bank from, taxation of, 52
taxation of income, 52-54
H withholding tax obligation, 57- 58
initial public offering, see IPO
HDMF (Home Development Mutual Fund), 252-253
input tax:
HMOs (health maintenance organizations): On claims and losses by insurance companies, 202
as non-life insurance providers, 224 presumptive, 203
as supervised by DOH, 328, table 331
branch profit remittance tax on, 222 Insurance Commission (IC), 161, 317, 336, 339
definition of, 166 administrative requirements imposed by, 321-322
DST on membership agreement, 224-225
income tax and other taxes, 222 insurance company:
MCIT on, 172 as statutory payor of DST, 210-211
nature of business, 221-222 as supervised by IC, 321-322, table 331
VAT on, 223-224 branch profit remittance tax on, 179
business tax on other income, 194
holding companies, 290-291 classification of, 162-167
as supervised by SEC, table 334 definition of, 162
deposit administration contract (DAC), 176
Home Development Mutual Fund, see HDMF DST on insurance policies, 205-211
base and rate, table 205 - 206
Home Guaranty Corporation (HGC), 154-155, 254 documents and transactions exempt from, 209-210
on properties abroad, 208
on variable contracts, 208
use of metering machines, 210
456 Index
Index 457

IAET on, 270

fire tax on, 2u
gross receipts for VAT purposes, computation of, 199
group deferred annuity contract (GDAC), 176
IAET on, 180
insurance products, tax advantages of, 177-179
interest income from mortgage and loans, 193-194
liberalization of business of, 343
local business tax (LBT) on, 295, 298-299
MCIT 011,170-172
premium tax:
on agents of foreign, 196
on life, 186-196, 346
registration for mixed business, 199
regular income tax, 167-168
special deductions for, 168-169
taxation of, versus banks, 212-213
under Large Taxpayers Service (LTS), 336
VAT on non-life, 197-204
venue for filing and payment, 315
withholding tax obligations, 180-185
withholding tax on income of, 184-185
interbank call loans (IBCL), 48-50
exemption from DST, 136
taxation of, 49
interbranch or interdepartmental advances:
DST on, 134-135
interest expense:
back-to-back transaction, 24
limitation on the deductibility of, 24-25
related party limitation, 26
requirements for deductibility of, 23-24
interest income:
versus foreign exchange gains, 38
versus trading and redemption gains, 36-40
investment company:
as supervised by SEC, 326
classification of, 266-267
definition of, 265
DST on, 270-271
GRT on, 270
income tax, MCIT and other taxes, 267-270
investment house:
branch profit remittance tax on, 258
classification of, 257
definition of, 255
DST:
CSST, 263
on electronic documents, 265
rates of, table 262
securities borrowing and lending (SBL), 264
shares of stock, 261-262
GRT on, 260-261
IAET on, 259
income tax and other taxes, 258-259
specific regulatory requirements, 257
underwriting as principal business of, 256
with QB functions as supervised by BSP, 326, table 333
without QB functions as supervised by SEC, 326, table 333
investment management account (IMA), 269-270
income of the bank from, taxation of, 52
nature of, 51
taxation of income, 52-54
withholding tax obligation, 57-5 8
IPO (initial public offering):
IPO tax on, 275, 277-278
L
Land Bank of the Philippines (LBP), 158-159, 294, 315, 318
Large Taxpayers Service (LTS), 336
lending investors, 292
without QB functions as supervised by SEC, 327-328, table 334
with QB functions as supervised by BSP, 327, table 334
life insurance company:
definition of, 163
FBT exemption of group life and health premiums, 177
459 Index
Index 459

premium tax on, 186-196, 335, 346 minimum corporate income tax, see MCIT
tax exemption:
of compensation for injuries or sickness, 173-174 money changers, 289
of proceeds and returns of premiums, 172-173
as supervised by BSP, 319-320, table 334
local business tax (LBT), 14 money laundering, 339, 341
filing and payment, 302
rate of, 293 mutual fund:
on banks and banking institutions, 294-295, 297-298, 301-302 definition of, 266
on financing companies, 296, 300, 302 dividends versus capital gains, 269-270
on insurance companies, 295-296, 298-300, 301-302
gains from redemption of shares, 268-269
situs of taxation, 301-3oz income tax, MCIT and other taxes, 267-268
tax base, 296-300
tax treatment of dividends distributed by, 268
versus GRT, 298 types of, 266
versus premium tax, 300
mutual life insurance companies:
long-term deposit or investment certificate, 213, 259 exemption from premium tax and DST, 195-196
definition of, 34
tax treatment of interest income from, 34 -35 N
long-term securities: non-life insurance company:
holding period, 40 definition of, 163
tax treatment of trading and redemption gains from, 35-36, 259 professional reinsurers, 200-202
types of, 163-165
M
VAT on, 197-204, 346
mark to market: nonperforming assets (NPAs), 61
profits and losses, 60,114-115
nonperforming loans (NPLs), 61
MCIT (minimum corporate income tax):
definition of gross income for, 78,170-172 nonstock savings and loan associations, see NSSLAs
on banks, 26-28
on financing companies, 235-236 non-trusteed plan, 176-177
on HMOs, 172, 222
on insurance companies, 170-172
on investment companies, 267 NSSLAs (nonstock savings and loan associations):
on investment houses, 258 as supervised by BSP, 319, 325, table 330
on lending investors, 292 nature of operations, 152-153
on pawnshops, 284-285 taxation of, 153-155
on pre-need companies, 172, 216-217
on securities brokers and dealers, 272 0
rationale behind, 7-8
rate of, 8 OBU (offshore banking unit):
background on taxation of, 65-71
460 Index Index 461

branch profit remittance tax on, 86-88 background, 28o

definition of, 18, 63
exemption of offshore income, 72
GRT liability on offshore income, u6-118
income of nonresidents from transactions with, 77
proof of nonresidency, 78-79
liability to DST, 137-138
restoration of tax exemption of, 71-72, 82-84
tax on onshore income, 75-77
taxes covered by exemption, 74-75
versus FCDU, 18
offshore banking unit, see OBU
OFW (overseas Filipino worker), 78-79
open-end investment company, see mutual fund
operating lease, definition of, 241
sale of membership in, 28o-281
PNB (Philippine National Bank), 160
premiums:
non-life reinsurance, 182, 204
paid by government, 203-204
paid by ITC, 184-185
premium tax, 13
applicability on mortgage or loans by insurance companies, 193-194
background, 186
exclusions from, 187-189
exemption of purely cooperative companies from, 195-196
on agents of foreign insurance companies, 196
on life insurance companies, 186-196
versus GRT, 212
versus local business tax (LBT), 300

option, 59 pre-need company, 214-215

pawnshops:
as supervised by SSP, 319-320, table 334
exemption from IAET, 285
income tax and other taxes, 284-285
nature of business, 283-284
PDIC (Philippine Deposit Insurance Corporation),
percentage tax:
on other income of insurance companies, 194
and proposed transfer of supervision to IC, 215, 324-325
as supervised by SEC, 215, 321, 324, table 331
classification of, 215-216
definition of, 166
DST on, 221
IAET on, 1.8o
income tax and other taxes, 172, 216-217
trust fund contributions of, basic features, 219
VAT on, 217-220, 346
229-230, 318
presumptive input VAT, 203
privately owned bank, 197

Philippine Crop Insurance Corporation (PCIC), 23o
Philippine Dealing and Exchange Corporation (PDEx), 321
Philippine Deposit Insurance Corporation, see PDIC
Philippine National Bank, see PNB
Philippine Stock Exchange (PSE):
as statutory payor of DST, 281
purely cooperative companies, see also mutual life insurance companies
exemption from premium tax and DST, 195-196
Q
quasi-banking (QB) function, 317
definition of, 99, 233
GRT on financing companies with, 238
investment houses with and without, 257, 326
462 Index Index 463

lending investors with and without, 327-328 NBFIs, 323

NBFIs with, 317-318 subsidiaries or affiliates of banks, 323
universal banks, 322
mandate, 32o-321
R

real and other real properties owned or acquired, see ROPOA shares of stock:
capital gains tax on sale of, 275-277
realization rule, 59 initial public offering (IPO) tax on sale of, 275, 277-278
stock transaction tax (STT) on sale of, 275, 277
repurchase agreements:
definition of, 48 Social Security System, see SSS
exemption from DST, 134
taxation of, 49-50 special purpose entity (SPE), 62
reverse repo: special savings deposit account (SSA):
definition of, 49 DST on, 124-128
exemption from DST, 134 computation of, 128
taxation of, 49-50
SPV (special purpose vehicle), 6o-61, 13o
reverse repurchase agreements, see reverse repo
SSS (Social Security System), 166, 318
ROPOA (real and other real properties owned or acquired), 61 exclusion from gross income:
DST on foreclosures and sales or conveyances of ROPOA, 130 of benefits, 228
GRT on net gains from, 110-112 of contributions, 228-229
sale by banks, 28-29 role as financial intermediary, 229
tax exemption of, 225-228
rural banks:
definition of, 17 stockbroker, venue for filing of returns, 315-316
tax incentives, 140-143
stock transaction tax (STT):
on sale of shares of stock, 275, 277
S
swap, 59
securities borrowing and lending (SBL), 264
swaption, 59
securities brokers and' ealers:
as supervised by SEC, table 333
DST on, 274 T
income tax and other taxes, 272
nature of business, 271 thrift banks:
definition of, 16-17
Securities and Exchange Commission (SEC), 317, 339 tax incentives, 143 -144
and BSP dual supervision over:
464 Index Index

top ten thousand corporations (iTc), 57-58, 182, 244, 250-251, 314 exemption of GSIS and SSS from, 227
CWT on premiums paid by, 184-185 input tax on claims and losses by insurance companies, 202
financial institutions liable to, 13
trading and redemption gains: on financial services in other countries, table 345
definition of, 37 on HMOs, 223
versus interest income, 36-40 on income from property of holding companies, 291
on insurance and reinsurance commissions, zoo
trust company: on lending investors, 292
administrative requirement for, 157-158 on non-life insurance companies, 197-204
as supervised by BSP, table 330 on non-life reinsurance premium, 182, 204
nature of business, 155-156 on other income:
regulation and supervision, 156 of insurance companies, 194
taxation of, 156-157 of non-life insurance companies, 202
on pre-need companies, 217-220
trusteed retirement plans, 213 definition of gross receipts, 218
definition of, 175 on professional reinsurers, 200-202
tax benefits of 174-175 on securities brokers and dealers, 273-274
presumptive input on insurance premiums by government, 203
trust fund: withholding on premiums paid by government, 203-204
C0111111011, 50-57
definition of, 50 venture capital corporations, 288
individual, 52-57 as supervised by BSP, 319-320, table 334
irrevocable, 52
revocable, 52, 56
taxation of income, 52-55
withholding tax obligation, 56-58 zero-coupon bonds, 41-44, 254

universal banks, 16
dual supervision over, 322-323

variable contracts:
applicability of premium tax on, 192-193
nature of, 189-191
taxation of, 191-192

VAT (value-added tax), 13, 344

applicability on HDMF, 253
applicability on mortgage or loans by insurance companies, 193-194
computation of gross receipts of insurance companies, 199
466 Index