Liability for Deficiency Gross Receipts Tax and Penalty for Remaining 12 Years Life of Loan as a Result of Its Pretermination

September 11, 1986 BIR RULING NO. 166-86 220 000-00 166-86 S i r : This refers to your letter dated September 4, 1986 requesting a ruling based on the following facts: "1. A real estate loan for P500,000 covered by a real estate mortgage was applied for and approved, payable in fifteen (15) years term at 21% interest, further renewable every after three (3) years commencing on April 8, 1983 and up for renewal April 8, 1986. (amortization schedule attached) "2. However, instead of renewing the loan for the next three (3) years (1986-1989), borrower decided to preterminate the loan instead of renewing same effecting full payment of outstanding principal balance (attached receipts of payments). "3. After above settlement, Interbank despite written demand refused to release mortgaged title for the alleged non-payment of a computed deficiency GRT with penalty on the remaining life of twelve (12) years of said loan. (Letters dated July 14 & 30, 1986)" It is represented in this connection, that the promissory note executed by you in favor of Interbank provides that you agree to pay or reimburse any amount that Interbank may be required to pay by reason of such pretermination under any tax law or revenue regulation. Your query is whether you are subject to a deficiency gross receipts tax and penalty for the remaining twelve (12) years life of the loan as a result of its preterminations. In reply thereto, I have the honor to inform you that banks and non-bank financial intermediaries are subject to tax at the rates prescribed by Section 220 of the Tax Code as amended on gross receipts derived from sources within the Philippines, 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 transactions as short, medium or long term and the correct rate of tax shall be applied accordingly. Any additional tax that may arise as a consequence of the reclassification of the transaction shall be considered as a deficiency gross receipts tax does not correspond to the interest for the remaining 12 years life of the loan, since the loan has presumably been classified as a medium-term loan. The aforesaid gross receipts tax as well as the deficiency tax arising from pretermination are direct liabilities of Interbank (Sec. 222, Tax Code) although the same, by agreement, may be passed on to you as borrower. In other words, although the above promissory note provides that you agree to pay or reimburse any amount that Interbank may be required to pay by reason of pretermination nevertheless, as far as this Bureau is concerned, Interbank is the party liable for the payment of a deficiency gross receipts tax and penalty. As to whether you should comply with your obligation under the promissory note before the title to your mortgaged property is released is a matter which should be settled between you and Interbank. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner