BIR Ruling [DA-571-06]

September 22, 2006 BIR RULING [DA-571-06] Rev. Regulations No. 9-2004; BIR Ruling No. 002-2006 Roldan & Associates 596 Mcarthur St. cor. EDSA 3/F Rm. 302, Medella Building Cubao, Quezon City Attention: Pedro Q. Roldan Gentlemen : This refers to your letter dated June 16, 2006, requesting a clarificatory ruling on gross receipts tax being charged by Builders Savings and Loan Association, Inc. on the interest- payment you pay for the loan with them. It is represented that you contracted a loan from the Builders Savings and Loan Association, Inc.; that you are now paying the principal amount and the interest; that Builders Savings and Loan Association, Inc. is charging you a 5% gross receipts tax (GRT) on the interest you are paying; and that a copy of the Official Receipt reflecting the 5% Gross Receipts Tax (GRT), is attached as "Annex A". Hence, the following queries: 1. Is it right and lawful for Builders Savings and Loan Association, Inc. to charge the 5% GRT on the interest from the borrower? 2. Under Section 121 of the Tax Code, who has the obligation to pay the Gross Receipts Tax? In reply, please be informed that Republic Act No. 3779, "An Act to Provide for the Regulation of the Organization and Operations of Savings and Loan Associations" defines Savings and Loan Association as follows: DaAISH "Sec. 3. (a) Savings and Loan Association . shall include any corporation engaged in the business of accumulating the savings of its members or stockholders, and using such accumulations, together with its capital in the case of a stock corporation, for loans and/or for investments in the securities of productive enterprises or in securities of the Government or any of its political subdivisions, instrumentalities or corporations;" Thus, under Section 2.3 of Revenue Regulations No. 9-2004, implementing Section 121 of the Tax Code of 1997, Savings and Loan Association, is necessarily included as Non-bank Financial Intermediaries, which is defined as follows: "Sec. 2.3. Non-bank Financial Intermediaries . shall refer to persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others. This includes all entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with funds obtained from the public through the issuance, endorsement or acceptance of debt instruments of any kind for their own account, or through the issuance of certificates of assignment or similar instruments with recourse, trust certificates, or of repurchase agreements, whether any of these means of obtaining funds from the public is done on a regular basis or only occasionally. Thus, from the foregoing, Builders Savings & Loan Association, Inc., is a Non-bank Financial Intermediary subject to Gross Receipts Tax pursuant to Section 4 of the same Revenue Regulations which provides as quoted: "Section 4. Imposition of Gross Receipts Tax On Other Non-Bank Financial Intermediaries. Gross receipts of other non-bank financial intermediaries (non-bank financial intermediary not performing quasi-banking functions) doing business in the Philippines shall be subject to GRT at rates and on items of income provided hereunder: (a) From interest, commissions, discounts and all other items treated as gross income under the Code 5% (b) On interests, commissions and discounts from lending activities as well as income from financial leasing on the basis of remaining maturities of the instruments from which such receipts are derived: Maturity period is five (5) years or less 5% Maturity period is more than five (5) years 1% Accordingly, Builders Savings and Loan Association, Inc. is subject to the 5% Gross Receipts Tax under Section 121 of the Tax Code of 1997 as implemented by Revenue Regulations No. 9-2004, on its interest income from its lending activities. TECcHA However, GRT can be charged to the borrower as part of the cost of service, in which case, the passed-on GRT is no longer a tax but a part of the cost of service of Builders Savings and Loan Association, Inc. to its borrowers. A perusal of the sample contract with the Builders Savings and Loan Association, Inc., negates its claim that the GRT is chargeable to the borrower, as there is nothing stipulated in the contract that the payment of GRT shall be for the account of the borrower. As evidenced by a sample Official Receipt issued by the lender, the amount of P21,218.14 was charged to the borrower, in which case, the charging of the 5% GRT to the borrower is unwarranted and may construed as a breach of contract. 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