Rural Bank of Jaen, Inc.

December 7, 2007 BIR RULING [DA-633-07] Rural Bank of Jaen, Inc. P. Gonzalo Street, Jaen, Nueva Ecija Attention: Mr. Flores C. Sta. Maria Compliance Officer/Internal Auditor Gentlemen : This refers to your letter dated July 20, 2007 requesting for a ruling interpreting Section 16 of Republic Act No. 9337, specifically on the gross receipts tax levied on financial institutions, to wit: "SEC. 16. Section 121 of the same Code, as amended, is hereby further amended to read as follows: "SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-Banking Functions. There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: (a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived: Maturity period is five years or less 5% Maturity period is more than five years 1% (b) On dividends and equity shares 0% and net income of subsidiaries (c) On royalties, rentals of property, 7% real or personal profits from exchange and all other items treated as gross income under Section 32 of this Code (d) On net trading gains within the 7% taxable year on foreign currency, debt securities, derivatives, and other similar financial instruments Provided, however , That in case the maturity period referred to in paragraph (a) is shortened thru pre-termination, then the maturity period shall be reckoned to end as of the date of pre-termination for purposes of classifying the transaction and the correct rate of tax shall be applied accordingly. ETaSDc Provided, finally, That the generally accepted accounting principles as may be prescribed by the Bangko Sentral ng Pilipinas for the bank or non-bank financial intermediary performing quasi-banking functions shall likewise be the basis for the calculation of gross receipts. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar banking activities." On the basis of the afore-quoted provision, it is your contention that all income derived from a bank's lending operation depending on its maturity, i.e. interest income, service charges and penalties, all of which are derived from lending operations should be levied a gross receipts tax of 1% to 5%, while other income derived by banks outside its lending operations, i.e. interest on bank deposits, commissions from money transfer/remittances, gain on sale of ROPOA and other sources described in schedule (C) and (D) of Section 16 of Republic Act (RA) No. 9337 should be levied at 7%. In reply, please be informed that from the afore-cited provisions of RA No. 9337, it is clear that the income of banks and non-bank financial intermediaries performing quasi-banking functions were classified into two categories, namely: (1) schedule A refers to the income from lending operations; and (2) schedule C and D refer to passive income. It is apparent then that the law intends to have a different rate of tax on bank's income from its lending operation and those of passive income. In view thereof, this Office hereby confirms your contention that a gross receipts tax ranging from 1% to 5% shall be levied upon all income of Rural Bank of Jaen, Inc. derived from its lending operations/activities, whereas the other income (passive income) shall be levied at 7%. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service