BIR Ruling [DA-548-06]

September 14, 2006 BIR RULING [DA-548-06] R.R. 2-98; RMC 16-2003; DA-097-99; DA-ITAD-045-03 FFIC/BEAM, Inc . Mojon, San Jose Antique Attention: Ms. Josefa T. Doran Corporate Secretary Gentlemen : This refers to your letter dated August 24, 2006 stating that FFIC/BEAM, INC. is a domestic corporation registered with the Securities and Exchange Commission (SEC) on February 3, 1997; that it is organized as a management company; and that it is planning to put up investments as follows: 1. Open time deposits with banking institutions; and 2. Open a credit line agreement with banking institutions which will be secured by its cash/time deposits. In view thereof, you are requesting a ruling on the tax implications of the above transactions. In reply, please be informed as follows: 1) Pertinent portion of Section 2.57.1 of Revenue Regulations No. 2-98, as amended, provides as follows: "(G) Income Payment to a Domestic Corporation. The following items of income shall be subject to a final withholding tax in the hands of a domestic corporation, based on the gross amount thereof and at the rate of tax prescribed therefor: (1) Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements derived from sources within the Philippines Twenty Percent (20%) . xxx xxx xxx (3) Interest income derived from a depository bank under the Expanded Foreign Currency Deposit System, otherwise known as a Foreign Currency Deposit Unit (FCDU) Seven and one-half percent (7.5%) . . . . ." IDATCE The time/cash/savings deposits to be opened by FFIC/BEAM, INC. with banking institutions are subject to the withholding tax above prescribed. The withholding tax imposed thereon shall be deducted and withheld at the time the income payment is paid or payable in accordance with Sec. 2.57.4 of Revenue Regulations No. 2-98, as amended. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. On the other hand, pursuant to Section 179 of the 1997 Tax Code, as amended, a documentary stamp tax (DST) of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the face value of the "certificate of deposit" is imposed. Under Revenue Memorandum Circular No. 16-2003, the term "Certificate of Deposit" is defined as a "written acknowledgement by a bank of the receipt of money on deposit which the bank promises to pay to the depositor, bearer or to some other person or order. No particular form is necessary to constitute a certificate of deposit. The clear and unmistakable language of Section 179 of the Tax Code, as amended, imposes a tax on certificates of deposits drawing interest, orders for the payment of any sum of money otherwise than at sight or on demand. "Time deposit" on the other hand, is another form of a Certificate of Deposit in a bank. The term "time deposit" refers to a deposit account paying interest for a fixed term, with the understanding that funds cannot be withdrawn before maturity without giving advance notice (Barron's Dictionary of Banking Terms). It is so called because in theory (though no longer in practice) a person must await a certain amount of time after notice of his or her desire to withdraw part or all of his or her savings before the scheduled maturity date. Certificates of deposits or time deposits usually carry penalties for early withdrawal. (Black's Law Dictionary, 6th Edition) From the aforestated definitions, the essential elements of a Certificate of Deposit are as follows: 1. The bank receives money for deposit; 2. The bank acknowledges the receipt of the deposit through the issuance of a written document; 3. The bank promises to pay to the depositor or bearer or to some other person or order the deposit upon maturity, and 4. The bank imposes an early withdrawal penalty in case of withdrawal prior to maturity which comes in the form of reduced interest. From a technical point of view, a Certificate of Deposit has the following distinct features: 1. Minimum deposit requirement; 2. Stated maturity period; 3. Interest rate is higher than the ordinary savings account; 4. Not payable on sight or demand, but upon maturity or in case of pretermination, prior notice is required; and 5. Early withdrawal penalty in the form of partial loss or total loss of interest in case of pre-termination. TDcAaH If a written instrument or document meets the above-mentioned essential elements/features then such instrument will be considered a "certificate of deposit" for which a documentary stamp tax under Section 179 of the Tax Code of 1997, as amended, shall be imposed. 2. Upon availment of the Credit Line Agreement by FFIC/BEAM, INC. from the banking institutions, the documentary stamp tax prescribed under Section 179 of the Tax Code of 1997, as amended, shall be imposed. Accordingly, for each availment of the credit line, the corresponding documentary stamp tax shall be imposed at the rate prescribed in Section 179, regardless of the procedures involved. (BIR Ruling No. DA-097-99 dated February 15, 1999; ITAD Ruling No. DA-ITAD-045-03 dated March 17, 2003) Please be guided accordingly. (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service