Classification of Pawnshops as Lending Investors Subject to Lending Investor's Tax

October 30, 1991 BIR RULING NO. 221-91 116-00 065-91 221-91 Gentlemen : This refers to your letter dated July 16, 1991 requesting in behalf of the Chamber of Pawnbrokers of the Philippines, reconsideration of BIR Ruling No. 116-000-00-065-91 dated April 19, 1991 to the effect that pawnshops are subject to the 5% lending investors tax based on their gross income pursuant to Section 116 of the Tax Code, as amended. Your objections are based on the following arguments: 1. That for tax purposes, pawnshops are not lending investors since the term "lending investor" has acquired a generally accepted meaning in practice recognized by the Central Bank (CB); 2. That to include pawnshops in the coverage of lending investors tax, is to tax the former by implication and to amend impliedly the tax law; 3. That to include only pawnshops in the class of lending investors to the exclusion of all other lending and financing operations would be class legislation; 4. That pawnshops operations, including the charges they impose, are governed by law and the CB, unlike lending investors who have flexibility in their operations; 5. That the CB maintains separate registration for pawnshops and lending investors in view of their diversity; 6. That the mere deletion of the fixed tax on pawnshops should not be construed to mean that pawnshops should now be taxed as lending investors; it merely implies that pawnshops are no longer subject to fixed tax; 7. That pawnshops are different from lending investor is explicitly recognized under then Section 161 (3) (dd) and (ff) of the Tax Code; 8. That the essence of pawnshop operations is the pawn; 9. That pawnshops ticket is not subject to documentary stamp tax. In reply, please be informed as follows: (1) Then Section 157 (u) of the Tax Code, defining the term "Lending investor" as including "all persons who make a practice of lending money for themselves or others at interests," encompasses the activity of pawnshop operator. Pawnshops whose principal business activity is lending money at interest on the security of personal property easily falls under such definition. (2) Including pawnshops in the coverage of lending investor has not amended any provision of the Tax Code. It merely applied the definition to the reality that pawnshops are indeed engaged in the business of lending money at interest. (3) Subjecting pawnshop to lending investor's percentage tax without including other lending and financing operations is not class legislation because the latter are subject to other percentage tax, particularly the gross receipts tax on financing companies under Section 120 of the Tax Code, as amended. (4) & (5) The contention that pawnshop operations including the charges they impose are governed by law and the Central Bank, unlike lending investors who have flexibility in their operations, is non-sequitur (no connection between cause and effect). (6) Indeed, the deletion of the respective fixed taxes on pawnshops and lending investor merely implies that pawnshops are no longer subject to fixed tax. On the other hand, it does not nullify the conclusion that pawnshops are virtually lending investors. (7) That tax wise, pawnshop is separately treated from lending investor under then Section 161 of the Tax Code is true, but so are lending investors and dealers in securities (mentioned separately under then Section 161 (3) (dd) and (z) respectively; yet, they are both subject to percentage tax under the same section. Therefore, it cannot be concluded that if two business activities are separately treated for fix tax purposes . They are be treated separately also for percentage tax purposes . (8) Your contention that the essence of pawnshop operation is the "pawn" is only one way of looking at their two-sided operations. The other way of looking at it is that since they lend money at interest and requires a pledge of personal property as security (an accessory contract), the essence of their operation is lending money. (9) Section 195 of the Tax Code provides that on every mortgagor pledge of lands, estate, or property, real or personal, heritable or movable, whatsoever, where the same shall be made as a security for the payment of any definite and certain sum of money lent at the time or previously due and owing or forborned to be paid being payable, and on any conveyance of land, estate, or property whatsoever, in trust or to be sold, or otherwise converted into money which shall be and intended only as security, either by express stipulation or otherwise, there shall be collected a documentary stamp tax at the following rates: (a) when the amount secured does not exceed five thousand pesos, ten pesos; (b) on each five thousand pesos, or fractional part, thereof in excess of five thousand pesos, an additional tax of five pesos. Since the pawnshop ticket virtually evidences the pledge, it is the logical document subject to the documentary stamp tax under Section 195 of the Tax Code. For the foregoing reasons, your request for reconsideration of BIR Ruling No. 065-91 has to be, as it is hereby denied for lack of legal basis. cdtech This is the final decision of this Office on the matter. Very truly yours, (SGD.) JOSE U. ONG Commissioner