BIR Ruling [DA-520-03]

December 16, 2003 BIR RULING [DA-520-03] Section 22 (Y); DA-310-98 Cooperative Bank of Nueva Vizcaya Gaddang Street, Poblacion South, Solan Nueva Vizcaya Attention: Mr. Napoleon S. Clemencia Manager Gentlemen : This refers to your letter dated October 4, 2002 requesting for a ruling as to whether or not a withholding tax should be imposed on your interest earnings on the rediscounting/borrowing facilities availed by you from the Bangko Sentral ng Pilipinas. It is represented that you are a cooperative bank duly registered with the Cooperative Development Authority; that you have been availing of the rediscounting/borrowing facilities of the Bangko Sentral ng Pilipinas; that it is your opinion that these borrowings are not considered as deposit substitutes; and that you attached a list of creditors of the Cooperative Bank of Nueva Vizcaya, which is less than twenty (20), namely: LandBank of the Philippines, Bureau of Animal Industry, National Livelihood Support Fund, Department of Trade and Industry, QUEDANCOR, United Coconut Planters Bank, Agricultural Credit Policy Council. In reply, please be informed that Section 22(Y) of the Tax Code of 1997 provides: "Section 22(Y) 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. . . ." Generally, interest income from currency bank deposits, yield from deposit substitutes, trust funds and similar arrangement and royalties derived from sources within the Philippines and interest income you derive from a depository bank under the expanded foreign currency deposit system shall be subject to the 20% and 7.5% final tax, respectively, imposed under Section 27(D)(1) of the Tax Code of 1997. Based on the foregoing, it is the opinion of this Office, that your interest earnings on the rediscounting/borrowing facilities availed by you from the Bangko Sentral ng Pilipinas are not considered as deposit substitutes, hence shall not be subject to withholding tax since the requirement of the law is specific and that these borrowings do not fall under the definition of deposit substitutes as provided for under the aforementioned Section 22(Y) of the same Code, since the source of your funds come from less than 20 individual or corporate lenders at any one time. It is of course understood that your books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purposes of ascertaining whether you have been complying with the conditions under which you have been granted tax exemption or tax incentives and your tax liability, if any, pursuant to Section 235 of the Tax Code of 1997. (BIR Ruling No. UN-ECCP-064-95 dated August 29, 1995 cited in BIR Ruling No. UN-ECCP-009-96 dated February 28, 1996) EDHTAI This ruling is issued on the basis of the foregoing representations. 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group