Request of the Land Bank of the Philippines (LB), Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB) for exemption from the provision of Section 34(B)(1) of the Tax Code of 1997 for their government securities holdings representing the liquidity floor reserves.

June 17, 1998 BIR RULING [DA-246-98] MEMORANDUM FOR : Hon. Milwida M. Guevara Acting Secretary of Finance FROM : Commissioner Liwayway Vinzons-Chato RE : Request of the Land Bank of the Philippines (LB), Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB) for exemption from the provision of Section 34(B)(1) of the Tax Code of 1997 for their government securities holdings representing the liquidity floor reserves. DATE : June 1, 1998 It is represented that the income of the LB, DBP and the PNB on their government securities (liquidity floor reserves) should be subject only to the final withholding tax of 20%; that the base figure for the 41%, 39% and 38% interest expense reduction for the years 1998, 1999 and 2000, respectively, should be the income subject to the Final tax after netting off income from liquidity floor government securities (33% of government deposits); that the rationale behind the tax provision of Section 34(B)(1) of the Tax Code of 1997 is to minimize, if not eliminate tax arbitrage; that government banks, however, which are the major depository banks for government operating funds are required to put up a 50% liquidity floor on all government deposits; that the 50% liquidity floor consists of the following: (1) Deposits with BSP or Cash in vault (as primary reserves), 10%; (2) Government Securities (as liquidity reserves, BSP Circ. 10), 7%; (3) Government Securities (liquidity floor reserves), 33%; that the 33% of deposit that the depository bank has to invest in government securities is not for arbitrage purposes; that it is an investment in government securities which is mandated and limits the depository bank's ability to channel deposits generated into more profitable investments. LexLib COMMENTS : Section 34(B)(1) of the Tax Code of 1997 provides that, in general, the amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, However, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax: Forty-one percent (41%) beginning January 1, 1998 Thirty-nine percent (39%) beginning January 1, 1999 Thirty-eight percent (38%) beginning January 1, 2000 It will be observed that the BIR and/or the Department of Finance cannot issue a revenue regulation implementing the aforementioned provision which will exempt government banks, such as the LB, DBP and the PNB, from its provision specifically the reduction of the allowable deduction for interest expense by an amount equal to the following percentages of the interest income subjected to final tax, i.e., 41% beginning January 1, 1998, 39% beginning January 1, 1999 and 38% beginning January 1, 2000 since the law does not provide for any exemption from its provision for any kind of taxpayer. An exemption cannot be claimed unless it is expressly provided for in the law. (Collector vs. Manila Jockey Club, 98 Phil. 670) At most, a representation should be made to Congress for an amendment of said provision insofar as government banks are concerned. cdll (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue