BIR Ruling

March 31, 1997 MEMORANDUM FOR: The Commissioner We have before us for immediate resolution the protested internal revenue tax case of ABOITIZ & CO., INC. involving the amount of P1,011,333.10 representing alleged deficiency percentage tax on lending investors for taxable year 1993, inclusive of increments. cdtech Briefly, the antecedent facts may be summarized as follows: The origin of this case goes back to September 8, 1995. On such a date, a confidential information was filed with the Bureau denouncing the above-named taxpayer of certain violation of the Tax Code, more particularly stated as follows: "ABOITIZ & CO., INC. did not pay the five percent (5%) lending investor's tax for the interest income received from loans granted to affiliates. . . " (p. 1184; Docket) Based on the confidential information, a Letter of Authority was issued authorizing the examination/investigation of Aboitiz & Co., Inc. books and other accounting records. Said investigation eventually culminated in the issuance of the following proposed deficiency tax assessment, to wit: 1993 Deficiency Percentage Tax on Lending Investors Gross Income as Lending Investor P9,953,331.00 Multiplied by tax rate under Sec. 116, Tax Code 5% Tax Due-Basic P497,666.55 Add: Surcharge 25% 124,416.64 Interest 20% (3 years) 373,249.91 Compromise(RMO No. 1-90) 16,000.00 Percentage Tax Due and Collectible P1,011,333.10 =========== Taking cognizance of this Bureau's policy of affording each and every taxpayer the opportunity to present evidence to contest a deficiency tax assessment, the Appellate Division, on March 17, 1997, conducted a conference-hearing on the instant case. At the said hearing, taxpayer, through counsel, testified and adduced evidence which delved significantly on the defense that it is not a lending investor, and therefore, should not be subjected to the 5% lending investor's tax under Section 116 of the Tax Code, as amended. cdti ISSUE: The primordial issue that must be resolved in order to determine the validity of the above-proposed deficiency tax assessment is whether herein taxpayer can be classified or considered as lending investor within the purview of Section 116 of the Tax Code or not. RESOLUTION: After a careful consideration of the facts of the case as established by the investigation conducted, the documentary evidence submitted by the taxpayer, the law/s and jurisprudence involved, we are persuaded that Aboitiz & Co., Inc. is not a lending investor subject to the 5% lending investor's tax imposed under Section 116 of the Tax Code, as amended. In resolving issues similar to the one raised above, this Office always deems it imperative to lay down the fundamental law applicable to the case. Obviously, pertinent is Section 116 of the Tax Code which, among others, provides that: "Lending investors shall pay a tax equivalent to 5% of their gross income." Crucial to the aforecited provision is the determination to be made as to who are to be considered as lending investors. In a coterie of cases, the BIR has been consistent in its determination as to who are to be considered as lending investors subject to the 5% percentage tax. The Bureau, in essence, ruled that a lending investor includes all persons who make a practice or business of lending money for themselves or others at interest (BIR Rulings Nos. 65-91 and 221-91). From the foregoing, it can be easily gleaned that to be considered as lending investor subject to the 5% percentage tax, the following requisites must be present, viz: 1. One must be engaged in the business of lending money for themselves or others at interest; and 2. The lending of money must be carried on with a view to profit or livelihood . It is our considered view that the second requisite is totally and absolutely absent in this instant case. We need not emphasize the obvious that the 5% percentage tax on lending investors was imposed by the legislature upon the privilege of engaging in the business of lending money. The term 'business" being used without any qualification is construed to be restricted to activities for profit or livelihood (Coll. Vs. Club Filipino, 5 SCRA 321). aisadc It is, therefore, inescapable that herein taxpayer is not a lending investor subject to the provision of Section 116 of the Tax Code, as amended. In arriving at the said conclusion, we leaned heavily on the following considerations which were not only factually established by herein taxpayer's submitted rebuttal evidence but likewise undisputed by our Examiners from the Tax Fraud Division, to wit: 1. Aboitiz & Co., Inc. has substantial holdings, investments or interests in its subsidiaries and affiliates, and by virtue thereof, monitors the financial position and manages the overall financial affairs of the latter; 2. Aboitiz & Co., Inc. uses its credit line facility with some banks and financial institutions in extending financial assistance to its subsidiaries and affiliates; 3. Under the loan agreement between Aboitiz & Co. Inc., and its subsidiaries/affiliates, the loan is an accommodation type of intercompany advances which are extended depending on the cash position of the subsidiary and of Aboitiz & Co., Inc., and that all costs of money like interest and back charges incurred by Aboitiz & Co., Inc. will be passed on to subsidiary concerned; 4. The interest income received by Aboitiz & Co., Inc. from the subsidiaries/affiliates are mere reimbursement of interests charged by the banks and financial institutions to Aboitiz & Co., Inc.; 5. During the taxable years under investigation, the interest expense paid by Aboitiz & Co., Inc. to the banks were offset against the interest (reflected as interest income) passed on to the subsidiaries/affiliates, and the overall result was in the negative meaning the Aboitiz & Co., Inc. did not profit from the said extension of financial accommodation; and 6. Finally, Aboitiz & Co. Inc. caters only or extends financial assistance exclusively to its subsidiaries or affiliates and not to the general public as a whole. From the foregoing, we find merit to the taxpayer counsel's contention that the primary and only purpose of such financial assistance is to assist the subsidiaries in its business competition with other companies especially during those periods when the financial position of the subsidiaries were not sufficiently desirable, and that interests were charged just to pass on to the subsidiaries the interest and other charges incurred by Aboitiz & Co., Inc.. It is not uncommon in the world of business that parent companies extend financial assistance to subsidiaries. We have to take judicial notice that parent companies usually have the necessary credit lines to take care not only of their own financial needs but that also of their subsidiaries. The case of Aboitiz & Co., Inc. as shown by incontrovertible evidence on record is no different from theirs. With this statement, we now bring this memorandum to a close. In view thereof, the Legal Service, through its Appellate Division, respectfully recommends that the proposed assessment of P1,011,333.10 as deficiency 5% percentage tax on lending investors of ABOITIZ & CO., INC. for taxable year 1993 be withdrawn and cancelled for want of merit and this case considered closed and terminated. Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ALICIA L. TOMACRUZ Head Revenue Executive Assistant Legal Service Recommendation-APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue