BIR Ruling

November 24, 1969 11th Indorsement Returned to the Revenue Director, Revenue Region No. 14, Bacolod City, the within papers relative to the case of Central Savings and Loan Association, Dumaguete City, hereinafter referred to as the Association. LexLib It appears that there has been a conflict of opinion as to the taxability of the Association; whether it should be taxed as a lending investor under Section 182(A)(3)(u) of the Tax Code or as a banking institution under Section 249 of the same Code. The first view was adopted by that Office in its reply dated July 17, 1968, to the letter of Candelario Fambis, dated June 24, 1968. The Revenue District Office at Dumaguete City, however, considers the Association, a banking institution simply because it lends money at interests and grants commercial and agricultural loans. Pursuant to the order of this Office dated March 17, 1969 directing the prompt investigation of the Association's actual business operation, the Revenue District Office, thru Revenue Examiner Manuel A. Abellana, reported, to wit: "The principal business operations of the Association are lending money under salary loan to permanent employees, government or private firms, at the rate of 14% interest per annum, payable monthly and is usually for less than 12 months depending on the approval of the Board of Directors. Grants commercial, agricultural and real estate loans at the rate of 12% interest per annum. These loans are classified into two categories the long term within 10 years maximum duration and payable monthly and the short term which is payable within a period of one year. Loans are granted only to the residents of the province of Negros Oriental. The association accepts savings and the time deposits giving to the depositors interest at 6% and 7% per annum, respectively. To encourage the savings habit plan they promulgated a policy requiring prospective borrowers to make a deposit of at least P50.00, usually withheld from the amount granted upon release of the loan". Clearly, therefore, the principal business operations of the Association are lending money at interests, granting loans and accepting savings and time deposits: These are but some of the powers granted to savings and loan associations. According to Section 4 of Republic Act No. 3779, as amended, savings and loan associations may be organized as stock or non-stock corporations. Those organized as non-stock corporation confine their membership to a well-defined group of persons and do not transact business with the general public. They accept deposit from, and grant loans to, only their members. On the other hand, those organized as stock corporations are authorized to receive deposits from and extend loans to, the general public, and in accordance with Section 6 of the Law, such associations shall not have or carry upon their books for any person any demand, commercial or checking account, or any credits be withdrawn upon the presentation of any negotiable check or draft; and they are prohibited from advertising or representing themselves to the public as a bank, whether commercial or savings or as a trust company. Such associations are empowered by Section 5 of the same Act to grant loans and charge interest within the limits allowed by law, and to invest their funds in any sound non-speculative enterprise, as well as in bonds, securities, and other obligations issued by the Government of the Philippines or any of its political subdivisions, instrumentalities or corporations including government owned or controlled corporations. Member depositors participate in the profits of the savings and loan associations on the basis of their deposits on the date dividends are declared. From the import of the provisions of Republic Act No. 3779, stated above, savings and loan associations on the basis of their deposits on the date dividends are declared. From the import of the provisions of Republic Act No. 3779, stated above, savings and loan associations organized thereunder are not banks. However, those organized as stock corporations which extend loans to the general public, are considered lending investors subject to the fixed tax prescribed by Sections 182(A)(3)(u) of the Tax Code. Such associations whether organized as stock or non-stock corporations are subject to the income and residence taxes. cdlex Be guided accordingly. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue