BIR Ruling

September 7, 1971 Mr. Restituto G. Durante, Jr. Chief, Legal Branch Revenue Region No. 10 Lucena City S i r : This refers to your letter dated June 29, 1970 requesting a ruling as to whether the books of accounts of rural banks may be examined by internal revenue officers for tax purposes. acd It appears that the Rural Bank of Atimonan, Inc., Atimonan, Quezon and the Rural Bank of Lopez, Inc., Lopez, Quezon refused to submit their books of accounts for examination by internal revenue officers in connection with their 1968 income tax liabilities on the ground that rural banks are allegedly exempt from income tax by virtue of the provisions of Republic Act No. 5939, otherwise known as the Rural Banking Act. In reply, please be informed that Section 24 of the Tax Code, as amended by Republic Act No. 5431, subjects all corporate taxpayers other than those exempted under sub-section (c)(1) of Section 24 and Section 27 of the said Code to the corporate income tax, the provisions of existing special or general laws to the contrary notwithstanding. By virtue of the aforesaid amendment, the only corporations, associations and organizations exempt from corporate income tax under the National Internal Revenue Code are the purely cooperative companies or associations as provided for under Section 24(c)(1) and the organizations specifically exempt under Section 27. All other corporations, including those which under special laws are exempt from income tax are now subject to tax. Since Rural Banks are not among those corporations or organizations expressly exempted under Republic Act No. 5431, they are subject to income tax on income received or earned by them starting July 1, 1968 pursuant to Section 10 thereof. In fact, this liability to tax of Rural Banks as a consequence of the passage of Republic Act No. 5431 had been upheld by the Secretary of Justice, in his 3rd Indorsement dated March 28, 1968 to the Secretary of Finance. However, effective June 12, 1969, the tax exemption of Rural Banks had been restored by the subsequent enactment of Republic Act No. 5939 amending Republic Act No. 720 otherwise known as the Rural Bank Act. Section 14 of Republic Act No. 720 as amended, is further amended by Republic Act No. 5939 to read as follows: "Section 14. All rural banks created and organized under the provisions of this Act with net assets not exceeding one million pesos, excluding the counterpart capital subscribed and paid in by the Government under Sections seven and eight of this Act, shall be exempt from the payment of all taxes, charges and fees of whatever nature and description: Provided, however, That when the net assets of a rural bank exceed one million pesos, the taxes, charges and fees shall be levied in the proportion that such excess bears to the said net assets: Provided, finally, That when the net assets of a rural bank exceed three million pesos, it shall pay all taxes, fees and charges like any other bank." From the foregoing, it is clear that the Rural Bank of Atimonan, Inc. and the Rural Bank of Lopez, Inc. are subject to income tax on income received or earned by them starting July 1, 1968 until June 11, 1969, the tax to be computed at the increase rates prescribed by Section 24 of the Tax Code, as amended by Republic Act No. 5431. Such being the case, their books of accounts for the year 1968 should be submitted for examination for income tax purposes. In this connection, from June 12, 1969, said rural banks were already subject to internal revenue taxes if their net assets exceed one million pesos. Hence, an examination of their books of accounts by internal revenue officers is in order to determine whether they still fall within the tax exemption. Please be guided accordingly. aisa dc Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue