Tax Consequences and Classification for Taxation Purposes of a Preterminated Loan

August 5, 1994 BIR RULING NO. 124-94 119 000-00 124-94 Communication Solutions, Inc. Penthouse, Virra Building 500 P. Burgos Street, Bel-Air Makati, Metro Manila Attention: Ms . Fe D . Vicencio VP Finance & Legal Gentlemen : This refers to your letter dated December 10, 1993, stating that sometime in 1992, you obtained a five (5) year term loan from the Overseas Economic Cooperation Fund (OECF) which is administered by the Development Bank of the Philippines (DBP) thru the Union Bank of the Philippines (UBP), and collateralized by a real estate mortgage over certain prime real properties; that in July 1993, you were able to look for another creditor, Monte de Piedad Savings Bank (Monte) which was willing to assume the credit from UBP and accept as collateral a Mortgage Participation Certificate covering certain shares of stock; that you obtained DBP's approval to effect said change of creditor; that you sought the opinion of UBP as to whether such change of creditor is considered prepayment of the loan but the former answered you in the negative; and that before UBP agreed to release the real estate mortgage, it assessed you in the amount of P155,465.38 as deficiency gross receipts tax (GRT) on the ground that there is a conversion of your long-term debt to short-term debt, thus making you liable to pay the 5% gross receipts tax instead of 1% only. Based on the foregoing, you now request for confirmation of your opinion that there is no prepayment but only a change of creditor and, therefore, there is no conversion of debt from long-term to short-term. In reply, please be informed that banks and non-bank financial intermediaries are subject to tax at the rates prescribed in Section 119 of the Tax Code, as amended, on gross receipts derived from sources within the Philippine such as interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of the remaining maturities of the instruments from which such receipts are derived. However, in case the maturity period of an instrument is shortened thru pretermination, the maturity period shall be reckoned to end as of the date of such pretermination for purposes of classifying the transaction as short, medium or long-term and the correct rate of tax shall be applied accordingly. When you changed your creditor from UBP to Monte, you have in effect preterminated your loan with the former. Consequently, the rate of gross receipts tax is 5% since the loan is now classified, for taxation purposes, as a short-term loan. It may be stated herein that insofar as this Bureau is concerned, UBP is the party directly liable for the payment of the gross receipts tax although it may be passed on to you as borrower. As to whether you should pay the aforesaid amount of P155,465.38 being charged against you by UBP before the title to your mortgaged property is released, is a matter which should be settled between you and the former. cdta Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue