Lending Investor and Securities Dealer Activities

October 27, 1981 BIR RULING NO. 207-81 260-00 26-81 207-81 Guzman, Bocaling & Co. Certified Public Accountants 416 Regina Bldg. 6 Escolta, Manila Gentlemen : This refers to your letter dated May 7, 1981 requesting further clarification on the distinction between a lending investor and securities dealer activities on the one hand and quasi-banking activities on the other, in relation to the business practices of your client, Ayala Investment Development Corporation (AIDC). cdta You are also requesting confirmation that, in the case of your said client, the 3% percentage tax imposed on lending investors and securities dealer before the effectivity of P.D. No. 1739 will still apply to its income from receivables and inventory financing operations and dealership in CBCIs if these are funded by internally generated funds (e. g., capital contributions) plus the funds coming from the top nineteen lenders for as long as the lending sources included in the computation do not number twenty. You have represented earlier that AIDC has been licensed as a lending investor and dealer in securities prior to the promulgation of the quasi-banking law and continued to pay the corresponding privilege taxes thereafter because of its belief that there is no automatic change in the character of lending investor and securities dealer as a result of the quasi-banking law. In reply thereto, we would like to reiterate that for purposes of taxation prior to the effectivity of P.D. No. 1739, the distinction between a lending investor and securities dealer activities on the one hand and quasi-banking activities on the other lies in the source of funds used in the particular transaction. If the funds used are generated under the terms specified in the definition of quasi-banking activities, then the transaction may be characterized as one in the pursuit of quasi-banking activities. On the other hand, if the funds used in purchasing securities for resale or in lending money at interest come from sources other than that stated in the definition of quasi-banking activities then the transaction may be characterized as one in the pursuit of activities either as a dealer in securities or as a lending investor, as the case may be. (BIR Ruling No. 260-00-000-00-5-81 dated January 8, 1981). Thus, the identification of the funds used by a financial intermediary became material. Accordingly, since under Section 260 of the Tax Code, "quasi-banking activities shall refer to borrowing funds from twenty (20) or more personal or corporate lenders at any one time . . . ," your client's income from receivables and inventory financing operations and dealership in CBCIs which are funded by internally generated funds, such as capital contributions, plus the funds coming from the top nineteen (19) lenders , cannot be considered as having been derived from transactions in the pursuit of quasi-banking activities. Such being the case, said income is taxable at 3% of the gross under Section 209 of the Tax Code, prior to the effectivity of P.D. No. 1739. cdti Very truly yours, ROMULO M. VILLA Acting Commissioner