BIR Ruling

February 16, 1977 The Governor Central Bank of the Philippines Manila S i r : This refers to your letter dated February 3, 1977 requesting, in effect, advice on whether "deposit substitutes" may be considered bank deposits within the purview of Republic Act No. 1405 and consequently, interests paid on account thereof shall not be reported in the information return (Form No. 17.01B) required to be filed with this Office by Revenue Regulations No. 8-76. It appears that the requested advice was prompted by the Bankers Association of the Philippines which invited your attention to the opinion of the law firm of Taada Sanchez, Taada and Taada that interest payments on account of "deposit substitutes" should not be reported in the information return required by Revenue Regulations No. 8-76 as such deposits "fall equally within the ambit of Republic Act No. 1405 and may not be divulged save in instances therein authorized." This Office, however, has taken a different stand on the matter, for an analysis of the applicable laws reveal that "deposit substitutes" are distinct and different from the deposits referred to in Republic Act No. 1405. Deposit substitutes are defined thus SEC. 100-A. Definition of deposit substitutes . The term 'deposit substitutes' is defined as an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations . These instruments may include, but need not be limited to, bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, trust certificates and repurchase agreements. . . ." (Emphasis ours) (Republic Act No. 265 as amended by Presidential Decree No. 72) It will be noted from the abovequoted definition of "deposit substitutes" that they are distinct and different from bank deposits, and the difference between them are as follows: (a) In the case of a deposit, the depositor entrusts his money to a bank essentially for safekeeping and incidentally, to earn interest if the deposit is a savings or time deposit, and the bank admits the fact of deposit by issuing a pass book, a deposit slip, or a certificate of time deposit. However, in the case of deposit substitutes, money is placed with a bank or an investment house principally as an investment, receipt of which in acknowledged in debt instruments issued, endorsed or accepted by the latter. (see abovequoted provision of Section 100-A, Republic Act No. 265, as amended). (b) By law, money deposits can be placed by the general public only with banks and banking institutions, while deposit substitutes may also be placed with investment corporations and other financial institutions. (c) Bank deposits are mandatorily insured with the Philippine Deposit Insurance Corporation to the extent of P10,000.00, pursuant to Section 10 of Republic Act No. 3591, as amended. Deposit substitutes are not so insured precisely because they are not bank deposits. It is thus clear that deposit substitutes do not come within the purview of the term deposits as used in Republic Act No. 1405. As "deposit substitutes" do not come within the purview of the term "deposit" as used in Republic Act No. 1405, and considering that there is no law extending the privilege of absolute confidentiality to such kind of deposits, the logical conclusion is that the so-called "deposit substitutes" are not entitled to enjoy said privilege. In view thereof, it is the considered opinion of this Office that interests from "deposit substitutes" should be reported in the information return (BIR Form 17.01B) required to be filed with this Office by Revenue Regulations No. 8-76, pursuant to Section 77 of the Tax Code. Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3