BIR Ruling

May 10, 1977 Padilla Law Office 6th Floor Shurdut Bldg. Muralla, Manila Gentlemen : This refers to your letters dated March 4 and 9, 1977 requesting on behalf of your client, Philippine Trust Company (hereinafter referred to as PTC) a commercial bank, reconsideration of the ruling of this Office holding that interest payments on account of deposit substitutes should be reported in BIR Form 1701B. In your aforesaid letters, you requested reconsideration of the said ruling insofar as it affects the transactions of your client , alleging that money market transactions at PTC, in the form of promissory notes and repurchase agreements are not substantially different from certificates of time deposits covered by Republic Act. No. 1405, and therefore, are also covered by the confidentiality requirement of said law. And as additional ground to support your claim that deposit substitutes with banks should be reported in BIR Form 1701B, you cited the provisions of Section 97-A of the General Banking Act, as amended by Presidential Decree No. 71. cdt I reply, I regret to inform you that we find your request without merit, for the following reasons: A. The Central Bank, the agency exercising supervision over all banks, has issued a ruling which, in effect, confirms the ruling of this Office that deposit substitutes are not bank deposits within the purview of Republic Act No. 1405 and therefore, does not enjoy the privilege of absolute confidentiality provided for in said law; (see attached copy of our letter to the Central Bank dated February 16, 1977); B. Contrary to your contention, Section 87-A of the General Banking Act, inserted in said law by Presidential Decree No. 71, does not prohibit disclosure to all and any person information relative to the funds or properties in the custody of banks. Said law prohibits disclosure of such information to any unauthorized without order of a court of competent jurisdiction, but not disclosure to persons and entities authorized to receive such information . Thus the pertinent provision of said law reads as follows "SEC. 87-A. . . . xxx xxx xxx "(a) . . . xxx xxx xxx "(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations or any entity: Provided that with respect to bank deposits, the provisions of Republic Act Numbered 1405 shall prevail; or . . . (As amended by PD 71) (Emphasis supplied) The authority of this Bureau to received information relative to income earned from funds other than the bank deposits declared by Republic Act No. 1405 as "of an absolutely confidential nature" is found in Section 77 of the Tax Code, which provides that all persons, corporations or duly registered co-partnership making payment to another person, corporation or duly registered co-partnership of interest or other fixed or determinable gains, profits, or income of P1,800.00 or more " are authorized and required to render a true and accurate return to the Commissioner of Internal Revenue, under such rules and regulations and in such form and manner as may be prescribed by the Secretary of Finance, setting forth the amount of such gains, profits and income, and the name and address of the recipient of such payment ." In this connection, attention is invited to the following differences between Section 87-A of the General Banking Act and Republic Act No. 1405 1. Republic Act No. 1405 categorically states that deposits with banks and banking institutions in the Philippines and investments in government bonds are considered as of an absolutely confidential nature. There is no such provision in Section 87-A of the General Banking Act. 2. Pursuant to Republic Act No. 1405, even government officials, bureaus or offices cannot examine or looked into deposits with banks. However, Section 87-A of the General Banking Act prohibits disclosure only to unauthorized persons , which obviously does not include officials, bureaus and offices who, by reason of their duties and functions, can officially require submission of data relative to the funds and properties, other than deposits, of private individuals and entities, in the custody of the bank. That the funds or properties mentioned in Section 87-A of the General Banking Act, as amended, are considered distinct and different from the deposits covered by Republic Act No. 1405 is clearly deduced from that proviso in said law declaring that "with respect to bank deposits, the provision of Republic Act Numbered 1405 shall prevail." C. Since deposit substitutes are not bank deposits within the purview of Republic Act No. 1405, they should be treated equally, irrespective of whether they are placed with banks or non-bank financial institutions. To exempt from the requirements of Section 77 of the Tax Code, as implemented by Revenue Regulations No. 8-76, income from deposit substitutes placed with banks, while subjecting thereto income from deposit substitutes placed with investment houses and other non-bank financial institutions, would not only be unfair but would be violative of Section 17(1) of Article VIII of the Constitution which states that "the rule of taxation shall be uniform and equitable". In the light of the foregoing, we have arrived at the conclusion that the abovementioned ruling of this Office is in accordance with law, and therefore, your request for reconsideration of our aforesaid ruling has to be denied. You are therefore requested to advise your client to report in BIR Form No. 1701B the names and addresses of persons and entities which received from it interest or other income of P1,800.00 or more, earned from money market placements or deposits substitutes during the calendar year 1976, within thirty days from your receipt of this letter. Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3