BIR Ruling [DA-310-98]

July 7, 1998 BIR RULING [DA-310-98] Santos, Tardecilla, Verdolaga & Co. Suite 505-C, ITC Bldg. 337 Gil Puyat Ave., Makati City Attention: Mr . Virgilio R . Santos Partner Gentlemen : This refers to your letter dated February 18, 1998 stating that your client, Wharton Credit Corporation (WCC), is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) as a lending investor, with five (5) stockholders of record; that when business is good and the company is short of funds to lend to its borrowers, WCC borrows funds from the stockholders; that both WCC and the stockholders treat and consider the amount borrowed as advances to meet the immediate needs of the lending business; that the amount borrowed from the stockholders are being paid interest at the current rate and being subjected to 20% final withholding tax; and that the stockholders do not include the interest received from WCC in their income tax returns as the said interest was already subjected to the 20% final withholding tax. Based on the foregoing representations and document submitted, you are now requesting for opinion to the effect that the interest paid by WCC to its stockholders is not subject to 20% final withholding tax on interest. In reply, please be informed that pursuant to Section 22(Y) of the Tax Code of 1997, the term deposit substitutes shall mean an alternative form of obtaining funds from the public (the term ' public ' means borrowing from twenty (20) or more individual or corporate lenders at any one time), 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, or financing their own needs or the needs of their agent or dealer, and which may include but need not be limited to banker's acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignments or participation and similar instruments with recourse. Since WCC obtains loans directly from any of its five (5) stockholders (and who are categorically excluded from the term public ) whenever an immediate need arises, such borrowings cannot be classified as a form of public borrowings as defined in the above-mentioned Section 22 of the Tax Code. Such being the case, the loans or borrowings by WCC from any of its five (5) stockholders are not deposit substitutes subject to final withholding tax of 20% under Section 24(B)(1) of the Tax Code of 1997. Such interest income received by the lender-stockholder shall, however, be included in computing the taxable income of the concerned stockholder/s subject to the normal tax rate under Section 24 of the same Code. (BIR Ruling No. 452-88 dated September 15, 1988, BIR Ruling No. 106-90 dated May 29, 1990) cdll This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)