BIR Ruling No. 007-09

April 14, 2009 BIR RULING NO. 007-09 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated March 27, 2006 stating that Citibank N.A. is a foreign corporation organized and existing under the laws of the United States; that it operates a full service commercial bank in the Philippines through its Philippine Branch; that the Philippine Branch's principal place of business is located at the Citibank Tower, 8741 Paseo de Roxas, Makati City; that Citibank N.A.-Philippine Branch operates through a Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU); that the activities of the Philippine Branch are conducted through the Global Consumer, Global Corporate and Investment Bank, and Private Banking segments; that the Global Consumer segment includes full-service consumer franchise encompassing, among others, branch and electronic banking, consumer lending services, investment services and credit card services; that the Global Corporate and Investment Bank segment provides corporations, governments, institutions and investors with a broad range of financial products and services, including investment advice, financial planning and brokerage services, banking and financial services; that the Private Banking segment offers a broad range of financial products and services from global investment centers around the world, including mutual funds, closed-end funds, managed accounts, and personalized wealth management services to institutional, high net worth, and retail clients; that in the normal course of its business operations, Citibank N.A.-Philippine Branch regularly engages in the trading (buying and selling) of foreign currencies; that it also invests in debt securities, derivatives and other similar instruments; that these financial instruments are either held until maturity or held principally with the intention of selling or trading them in the near future; and that from these financial trading activities, Citibank N.A.-Philippine Branch realizes foreign exchange income/loss and trading account profit/loss. In connection therewith, you now request for an opinion as to whether or not for purposes of determining the gross receipts tax "on net trading gains within the taxable year on foreign currency, debt securities, derivatives and other similar financial instruments" under Section 121 of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9238, as further amended by R.A. No. 9337, any loss or gain on each of the trading of foreign currencies, debt securities, derivatives or other similar instruments may be offset against each other, such that the total gain, net of all the losses, shall be subject to tax. In reply thereto, please be informed that Section 121 of the Tax Code of 1997, as amended by R.A. No. 9337, provides that "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: ESHAcI "(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 and 0% 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 taxable 7% year on foreign currency, debt securities, derivatives, and other similar financial instruments Corollarily, Section 3 of Revenue Regulations No. 9-2004, implementing then Section 121 of the Tax Code of 1997, as last amended by R.A. No. 9337, provides that cDaEAS "xxx xxx xxx "In computing for the net trading gain within the taxable year on items of income provided in (d) above, the figure to be reported in the monthly percentage tax return (GRT) shall be the cumulative total of the net trading gain/loss since the first month of the applicable taxable year less the figures already reflected in the previous months of the same taxable year. Provided, that net trading loss on items of income provided in (d) above may only be deducted from net trading gain on items of income provided in (d) above, but not from any other items of gross receipt to arrive at the total monthly gross receipts tax due." EHTIcD It is clear from the above provisions that the gross receipts are classified into four (4) categories, i.e., (a) interest, commissions and discounts from lending activities and income from financial leasing; (b) dividends and equity shares; (c) royalties, rentals and all other items treated as gross income; and (d) net trading gains, with each category having its own applicable tax rate. A close perusal of the aforesaid provisions disclosed that the gains on trading transactions are classified as one category of gross receipts subject to gross receipts tax of 7%. Thus, it is undisputed that the law evidently considers the net gains realized by banks and non-bank financial intermediaries from trading of foreign currency, debt securities, derivatives and similar financial instruments as a group. Accordingly, for the computation of net gain on the trading of foreign currencies, debt securities, derivatives and other similar financial instruments collectively the following rules shall be considered: First, the rules require that "in computing for the net trading gain within the taxable year on items of income provided in (d) above, the figure to be reported in the monthly percentage tax return (GRT) shall be the CUMULATIVE TOTAL OF THE NET TRADING GAIN/LOSS." Clearly, the taxable gross receipts refer to the total net gain/loss. Total means the whole or all the trading gains/losses. All trading gains and losses should therefore be considered and only one net trading gain shall be subjected to tax. aEDCAH Second, there is no prohibition from the deductibility of losses from any item in letter (d) from any gain from any item in letter (d). Otherwise, the rules would have provided so. In fact, the rules clearly provide that the "net trading loss on items of income provided in (d) above may only be deducted from net trading gain on items of income provided in (d) above, but not from any other items of gross receipt to arrive at the total monthly gross receipts tax due." Again, the rules allow that the losses on the trading of items in letter (d) to be deducted from the income from the trading of income from items in letter (d). This means that any losses from the trading of foreign currencies, debt securities, derivatives and other similar financial instruments may be deducted from the gain from the trading of foreign currencies, debt securities, derivatives and other similar financial instruments. What the rule prohibits is the deduction of losses in letter (d) from the receipts under letters (a), (b) and (c). For example, if the transactions under letter (d) pertain only to a trading loss on foreign currency of P10 and a trading gain on derivatives of P15, the P10 may be deducted from the P15 and only the net gain of P5 shall be taxable. But this could not be deducted from any item of income in letters (a), (b) and (c). if the gain/loss from the trading of foreign currency and the derivatives were to be treated separately, then the loss of P10 would not be deductible at all. Certainly, the P10 can not be deductible from loss from foreign currency itself precisely because it is at a loss. Neither can it be deducted from the items of income from letters (a), (b) and (c) because of the specific prohibition. Where can it be deducted then when the rules allow its deduction? Since the rules allow the deductibility of the loss on trading of foreign currency of P10 and prohibits its deductibility from income from letters (a), (b) and (c), it is only logical that it is deductible from P15. Otherwise, its deductibility would not have any meaning at all. Third, a reference to the Monthly Percentage Tax Return (BIR Form No. 2551M) would show that the net gain on the trading of foreign currencies, debt securities, derivatives and other similar financial instruments should be presented as one. BIR Form No. 2551M, which is the return used for filing the gross receipts tax, provides for only one Alphanumeric Tax Code (ATC) on net gain on the trading of foreign currencies, debt securities, derivatives and other similar financial instruments, which is PT104. This means that only one net gain or loss shall be presented in the return. Whatever is the total net gain presented in the return shall be subjected to tax. If the intention is to treat the net trading gains or losses for each of the items traded separately, then there should be as many ATCs as there are different items being traded, since each item may either result to a gain or a loss. In the example above, if there is a need to separately present the items of income/loss from the trading of derivatives and foreign currencies, then there should be one ATC for derivatives where the gain of P15 is presented and another ATC for foreign currency where the loss of P10 is presented. But this not the case, since only one ATC is provided, then only the net gain of P5 (P15 less P10) shall be presented, and that is the amount subjected to tax. This leads to only one clear conclusion: all trading gains and losses should be considered and only one net trading gain or loss shall be presented in the tax return. This presentation in the return further confirms the collective computation of net trading gains/losses. Finally, the established rules in statutory construction are equally applicable to tax statutes; after all, the primordial consideration is the legislative intent. But where doubts exist in determining that intent, the doubt must be resolved liberally in favor of taxpayers and strictly against the taxing authorities (Commissioner v. Fireman's, Inc. Co., G.R. No. L-30644 dated March 9, 1987). This is because taxes are burdens on the taxpayer, and should not be unduly imposed or presumed beyond what the statutes expressly and clearly import. In applying the aforesaid provisions in the instant case, the net trading gain subject to gross receipts tax pertains to the collective net gain on all transactions relating to the trading of foreign currencies, debt securities, derivatives and similar financial instruments. Accordingly, for as long as the income of banks and non-bank financial institutions is derived from "trading transactions", whether the same arises from trading of foreign currency, debt securities, derivatives or other similar financial instruments, any loss or gain on trading of such items can be accumulated or offset against each other to arrive at the net trading gain for the taxable month. Thus, for purposes of computing gross receipts tax, the total taxable net gain of the group shall be the basis of the gross receipts tax. Otherwise stated, the net trading gain subject to gross receipts tax shall be the sum of all the gains derived from the trading of foreign currencies, debt securities, derivatives and similar financial instruments, net of all the losses derived from the trading of foreign currencies, debt securities, derivatives and similar financial instruments. AECacS SUCH BEING THE CASE, this Office holds that the net trading loss incurred by Citibank N.A.-Philippine Branches from the trading of debt securities, derivatives or other similar instruments may be deducted from the net trading gain realized from the trading of foreign currencies or vice-versa, i.e., the net trading loss from foreign currencies may be deducted from net trading gain derived from debt securities, derivatives or other similar instruments in computing the gross receipts tax due pursuant to Section 3 of Revenue Regulations No. 9-2004. 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. cTCaEA Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue