BIR Ruling [UN-170-95]

April 19, 1995 BIR RULING [UN-170-95] Sycip Gorres Velayo & Co. P.O. Box 256 Makati Central Post Office 1299 Metro Manila Attention: Atty . E . C . Alcantara Tax Division Gentlemen : This refers to your letter dated April 3, 1992 protesting for and in behalf of your client, the Security Diners International Corporation, 5th and 6th Floors, WIP Bldg., 340 Senator Gil. J. Puyat Avenue, Makati, Metro Manila, the assessment of this Office involving the amount of P8,006,847.03 representing deficiency percentage/business tax, inclusive of increments thereon for the year 1988 on the ground that the same has no legal and factual bases. Records of this case disclosed that the taxpayer is a corporation organized and existing under and by virtue of the laws of the Philippines; that it is engaged in the business of issuing credit cards and extending credit to the holders thru the use of their respective cards by buying and discounting accounts receivable from affiliated merchants (charge availment/purchases); that while their income consist of interest from overdue accounts, service charges, liquidated damages, etc., their primary source of revenues are discounts earned from purchasing receivable bills/slips from affiliated merchants which is about 4% of the invoice; that merchants must send the charge slip or invoice to the companies within a certain period between 15 to 30 days from date of invoice, which invoice must be paid within 48 hours or within a certain period of time; that the holder must make payment within 15 days from date of statement of account or within 30 days from date of invoice; that no relationship exists between the merchant and holder except for the merchant to honor the card; that the holder is obligated only to the company which is solely responsible to the merchant; that while the company does not buy or contract to buy goods or services from the merchants, it finances the holder for its purchases on credit which in turn is paid by the company prior to billing the holder; and that at no instance must the merchant give cash to the holder of the card. In reply thereto, please be informed that in BIR Ruling 100-00, 102-00-000-00-151-90 dated August 16, 1990, this Office ruled as follows: "xxx xxx xxx "In reply, please be informed that based on the foregoing facts, the credit card company generates revenues principally from discount granted by the establishment and incidentally from fees paid by the cardholder, and that the credit card company finances the cardholder for the latter's purchases on credit, since said purchases are paid by the company prior to billing the cardholder. Accordingly, these activities fall within the purview of finance companies, or similar to it, as defined in Section 11 of P.D. No. 1739, which reads as follows: "(ee) The term "finance companies" refers to corporations or partnerships other than a bank, or insurance company, primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises whether by granting direct loans or by discounting or factoring commercial papers or accounts receivables for profit, buying and selling contracts, leases, chattel mortgages and other evidences of indebtedness arising out of one or more of the steps in the distribution and sale of commodities." "Pursuant to Section 120 (formerly 221) of the Tax Code, as renumbered by Executive Order No. 273, the tax rate applied on discounts, among others, is based on the remaining maturities of the instruments from which said discount is derived by the finance company, or person performing similar financing activities. In the instant case, it is the charge sales slip (issued by the establishment to the company evidencing sales to the cardholders) in relation to their agreement in the instrument that generates the revenue which are taxable at various rates pursuant to Section 120 of the Tax Code. As the establishment are required to send the charge slips to the companies for payment within 15 to 30 days from the date of the invoice, and from receipt thereof payment is made within 48 hours, it can be said that the same is a short-term maturity (less than 2 years) instrument; hence, subject to the gross receipts tax of 5% based on the adverted provision of the Tax Code." Such being the case, and since the activities of your clients falls within the purview of "finance companies, or similar to it" as defined in Section 11 of P.D. 1739, it is subject to the gross receipts tax of 5% pursuant to Section 120 (formerly Section 221) of the Tax Code, as amended. Accordingly, the aforementioned assessment is legal and proper. In view thereof, you are requested to urge your client, Security Diners International Corporation to pay the aforementioned amount of P8,006,847.13 representing deficiency percentage/business tax inclusive of increments thereon for the year 1988 within thirty (30) days from receipt hereof; otherwise, this Office will be constrained to enforce collection thereof through the summary remedies prescribed by law. This constitutes the final decision of the Office in this case. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue