BIR Ruling

July 15, 1975 De Santos, Balgos & Perez Law Offices Suite 308-311 Doa Narcisa Bldg. Paseo de Roxas, Makati, Rizal Gentlemen : This refers to your letter dated April 2, 1975 requesting clarification as to whether or not your client, Paramount Finance Corporation, a quasi-bank duly licensed as such by the Central Bank, classified as a bank and therefore liable for the 5% tax imposed by Section 249 of the Tax Code, is exempt from the personal holding company tax. cd It is represented that Paramount Finance Corporation is a company duly licensed by the Central Bank through the Monetary Board to perform quasi-bank functions; that in pursuing its quasi-banking activities, it accepts money placements, from the public or credits are opened and Paramount issues, endorses or accepts promissory notes, drafts, bills of exchange and other deposit substitutes; that the money raised from the public are used to give loans or for purposes of buying notes, bills and other receivables at a discount; and that in doing so, Paramount earned interests from direct loans to certain customers and discounting fees from purchase of various commercial papers. In reply, I have the honor to inform you that under Section 64(b) of the Tax Code, the term "personal holding company" does not include a bank duly licensed to do business as such in the Philippines. The reason for exempting banks to the personal holding company surtax is explained in the decision in the case of Palm Beach Trust Co. vs. Commissioner of Internal Revenue, 9 Tax Court, 1060, 1067, pertinent portion of which is quoted as follows: "That it was not the purpose in excepting "banks" to exclude such restricted and intimate family ventures seems apparent not only from this consideration of the legislative language, but also from the purpose to be served. The reason why Congress enacted the cognate exception of "banks" from the operation of the undistributed surplus tax (section 104(b) "is succinctly stated in the Report of the Committee on Ways and Means, H.R. No. 2475, 74th Cong.: . . . This seems to be a wise public policy, since the surplus of the banks must be built up for the protection of the depositors . . . ' The imposition of an additional tax on the undistributed earnings of a banking institution would have been equivalent to flying in the face of the settied policy of banking authorities requiring the establishment of reserves, out of the bulk of earnings, for the safety and protection of the depositing public ." Staunton Industrial Loan Corporation v. Commissioner (C.C.A., 4th Cir.), 120 Feb. (2d) 930. No such public purpose is present on these facts, and the conclusion seems to be required that petitioner, not being a bank within the meaning of the defining section, was during the period in issue a personal holding company." (Emphasis ours). Under Circular No. 387, Series of 1973 of the Central Bank of the Philippines, before any corporation can engage in quasi-banking activities, it must first obtain a certificate of authority from the Central Bank. And like other banks, quasi-banks are encourage to build-up their capital and are required to maintain a minimum capital reserve. (CB Circulars 439, 412 and 389). Inasmuch as documentary evidence submitted shows that Paramount Finance Corporation is a quasi-bank duly licensed as such by the Central Bank and that it is taxed under Section 249 of the Tax Code, it is not subject to the personal holding company tax prescribed in Section 63 of the same Code. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN 1601-593-5