BIR Ruling No. 002-06

February 14, 2006 BIR RULING NO. 002-06 RR No. 9-2004 000-00 Grolier International Finance, Inc . 27th Floor Pacific Star Building Sen. Gil Puyat St. cor. Makati Avenue Makati City Attention: Mr. Federico L. Daleon Treasurer Gentlemen : This refers to your letter dated June 27, 2005 requesting confirmation of your opinion that Grolier International Finance, Inc . is subject to gross receipts tax instead of the 10% value-added tax (VAT). It is represented that Grolier International Finance, Inc . is a corporation duly registered with the Securities and Exchange Commission under SEC Registration No. A199804235 dated March 16, 1998; and that the primary purposes for which the corporation was formed are the following: "1. To extend credit facilities to consumers, dealers, retainers and to industrial, commercial, and agricultural enterprises by discounting or factoring commercial papers or accounts receivables; 2. To buy or sell contracts, leases, chattel mortgages, or other evidences of indebtedness; 3. To lease motor vehicles, heavy equipments and industrial machinery, business and office machines and equipment, appliances and other movable property." In reply, please be informed that Section 2.7 of Revenue Regulations No. 9-2004 provides: "2.7. Financing Companies shall refer to corporations except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or, by discounting or factoring commercial papers or accounts receivables, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness or by financial leasing of movable as well as immovable properties." SCHcaT From the foregoing, Grolier International Finance, Inc . is considered a financing company which is a non-bank financial intermediary not performing quasi-banking functions. Section 4 of the same Revenue Regulations provides: "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% In the case of financial leasing, the taxable gross receipts shall consist only of interest income (recovery of principal not included). However, in the case of transactions under operating lease agreement, the gross receipts is the gross rental amount. Whether the lease transactions is "finance lease" or "operating lease" shall be determined, by the contents of the document evidencing the lease agreement or, in short, the substance of the agreement rather than the form used to evidence such agreement between the lessor and the lessee. Provided, finally, that the financial statements from which the basis for deriving the taxable gross receipts is to be determined must be prepared likewise in accordance with the generally accepted accounting principles as may be prescribed by the Securities and Exchange Commission (SEC) for other non-bank financial intermediaries (Non-bank Financial Intermediaries not performing quasi-banking functions)." Accordingly, since Grolier International Finance, Inc . is engaged in extending credit facilities as well as leasing activity, it shall be subject to 5% or 1% gross receipts tax depending on the maturity period of the credit and leasing activities. Finally, its financial statements must be prepared in accordance with the generally accepted accounting principles as may be prescribed by the SEC. 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. HEASaC Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue