The Hongkong and Shanghai Banking Corporation Limited

July 26, 2007 BIR RULING [DA-411-07] 122; UN170-95 The Hongkong and Shanghai Banking Corporation Limited The Enterprise Center Tower 1, 6766 Ayala Avenue corner Paseo de Roxas Makati City Attention: Ms. Minna Tablanza Senior Vice President-Tax Compliance Gentlemen : This refers to your letter dated May 16, 2007 stating that the Hongkong and Shanghai Banking Corporation Limited (HSBC HK) is a foreign bank duly licensed and registered to do business in the Philippines through HSBC; that HSBC carries on in the Philippines, among other businesses. IEHTaA 1. A card issuing business, whereby HSBC markets and issues credit cards to cardholders and collects credit card payments from cardholders who use their cards to purchase goods or services from accredited merchants; and 2. A merchant acquiring business, whereby HSBC enters into merchant agreements with accredited merchants for them to honor credit cards issued under the various card associations of which HSBC is a member (such as MasterCard and Visa). HSBC pays the merchants the amount of the charge sales slips evidencing the price of the goods and services purchased by the cardholders, with funds received from the respective card associations, less discount which represent HSBC's income from its merchant acquiring business. that HSBC HK plans to restructure its credit card business in the Philippines by transferring HSBC's merchant acquiring business to the joint venture (JV); that as HSBC will retain its card issuing business, the JV will not issue credit cards to or collect payments from cardholders; that HSBC will remain a member of the card associations; that because a member of the card associations must be a party to each merchant agreement pursuant to card association rules, the merchant agreements with merchants will be entered into by, between, and among HSBC, the JV, and the merchants; that under the merchant agreements, after providing cardholders the goods or services, the merchants will send the charge slips to the JV; that the JV will then process and coordinate the settlement of the charge sales slips with the merchants within a period of forty-eight (48) hours or as agreed with the merchant, using funds received from the various card associations which are credited to the JV's account to be maintained with HSBC; that the settlement account for each charge sales slips shall be the face value of the charge sales slip net of certain amounts payable to the card associations and card issuer, as well as the discount earned by the JV in the settlement of the receivables, which is normally computed as a fixed percentage of the face value of the charge sales slip, similar to the discount currently earned by credit card companies from their merchant acquiring business; that in summary, the JV will earn income, in the form of a discount, similar to that previously earned by HSBC from its merchant acquiring business, for performing the following activities: (a) authorization of card transactions which are transactions for sale of goods and/or services involving cards issued under the card associations and/or card issuers accepted by the JV; (b) electronic draft capture (or collection of sales slips) of card transactions; (c) outclearing of card transactions to the appropriate credit card associations and/or card issuers; (d) provision of information to HSBC to effect settlement of such transactions; (e) dispute resolution with cardholder's banks; and (f) transaction-related reporting and merchant statements; (g) sales slips settlement processing and coordination of sales slips payment to the merchants for the price of goods or services purchased by cardholders, using the funds received from various card associations credited to the JV's account with HSBC, less certain amounts payable to the card associations and card issuer as well as the discount earned by the JV. In connection therewith, you now request confirmation of your opinion that the income that the JV will earn from its merchant acquiring business will be subject to the gross receipts tax (GRT) of five percent (5%) under Section 122 of the Tax Code of 1997. In reply thereto, please be informed that Section 122 of the Tax Code of 1997, as amended by Republic Act (RA) No. 9238, states "Sec. 122. Tax on Other Non-Bank Financial Intermediaries . There shall be collected a tax of five percent (5%) on the gross receipts derived by other non-bank financial intermediaries doing business in the Philippines, from interest, commissions, discounts and all other items treated as gross income under this Code: Provided, That interests, commissions and discounts from lending activities, as well as income from financial leasing, shall be taxed on the basis of remaining maturities of the instruments from which such receipts are derived, in accordance with the following schedule: Maturity period is five (5) years or less 5% Maturity period is more than five (5) years 1% xxx xxx xxx Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar financing activities." AEIHaS In stressing the rationale of the above-cited provisions, this Office elucidated the matter in BIR Ruling No. 151-90 dated August 16, 1990, as follows: ". . . the credit card company generates revenues principally from discount granted by the establishment and incidentally from fees paid by the cardholder, and that the credit card company finances the cardholder for the latter's purchases on credit, since said purchases are paid by the company prior to billing the cardholder. Accordingly, these activities fall within the purview of finance companies, or similar to it, as defined in Section 11 of P.D. No. 1739, which reads as follows: (ee) The term 'finance companies' refers to corporations or partnerships other than a bank, or insurance company, primarily organized for the purpose of extending credit facilities to customers and to industrial, commercial or agricultural enterprises whether by granting direct loans or by discounting or factoring commercial papers or accounts receivables for profit, buying and selling contracts, leases, chattel mortgages and other evidences of indebtedness arising out of one or more of the steps in the distribution and sale of commodities. Pursuant to Section 120 (formerly 221) of the Tax Code, as re-numbered by Executive Order No. 273, the tax rate applied on discounts, among others, is based on the remaining maturities of the instruments from which said discount is derived by the finance company, or person performing similar financing activities. In the instant case, it is the charge sales slip (issued by the establishment to the company evidencing sales to the cardholders) in relation to their agreement in the instrument that generates the revenue which are taxable at various rates pursuant to Section 120 of the Tax Code. As the establishment are required to send the charge slips to the companies for payment within 15 to 30 days from the date of the invoice, and from receipt thereof payment is made within 48 hours, it can be said that the same is a short-term maturity (less than 2 years) instrument; hence, subject to the gross receipts tax of 5% based on the adverted provision of the Tax Code." The above-cited ruling was later reiterated in BIR Ruling No. UN170-95 dated April 19, 1995, where it was held that ". . . since the activities of your client [Security Diners International Corporation] fall within the purview of 'finance companies, or similar to it' as defined in Section 11 of P.D. No. 1739, it is subject to the gross receipts tax of 5% pursuant to Section 120 (formerly Section 221) of the Tax Code, as amended. . . ." IDaCcS IN VIEW OF THE FOREGOING, since the above-cited rulings are in all fours similar to the instant case, this Office hereby confirms your opinion that the income that the JV will earn from its merchant acquiring business is subject to the GRT of five percent (5%) under Section 122 of the Tax Code of 1997. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service