Request for Review of Bureau of Internal Revenue Ruling No. 242-2019

October 23, 2019 DOF OPINION NO. 014-19 Ma. Elizabeth Peralta-Loriega Puno and Puno Law Offices 33rd Floor, The Podium West Tower 12 ADB Avenue, Ortigas Center Mandaluyong City, Philippines SUBJECT : Request for Review of Bureau of Internal Revenue Ruling No. 242-2019 Dear Atty. Peralta-Loriega : This refers to the subject letter dated 24 May 2019 ("Request for Review") which you filed with this Department on behalf of SN Power Invest Netherlands B.V. ("SNPIN") to request for review of Bureau of Internal Revenue ("BIR") Ruling No. 242-2019 dated 5 April 2019, which ruled on SNPIN's request for confirmation of exemption from Philippine income tax and withholding tax on its income received from its investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on its deposits in banks in the Philippines under the NIRC of 1997, as amended. cHDAIS In particular, the Request for Review prays for the reversal of the BIR's findings that SNPIN is not considered within the term "foreign government" as contemplated in Section 32 (B) (7) (a) (i) of the NIRC, as amended. It does not even show that SNPIN is a financial institution in contemplation of law. Thus, it provided that any income derived by SNPIN from its investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on its deposits in banks in the Philippines shall be subject to Philippine income tax and consequently to withholding tax as follows: "IN VIEW OF THE FOREGOING, this Office hereby rules that SNPIN is not considered within the term "foreign government" as contemplated in Section 32(B)(7)(a)(i) of the 1997 Tax Code, as amended. Hence, any income derived by SNPIN from its investments in the Philippines in loans, stocks, bonds or other domestic securities, or interest on its deposits in banks in the Philippines shall be subject to Philippine income tax and consequently to the withholding tax." Firstly, BIR declared that SNPIN is not entitled to the requested exemption on the ground that SNPIN is not directly owned, controlled, or directly enjoying refinancing from the Kingdom of Norway. However, a plain reading of Section 32 (B) (7) (a) (ii) of the NIRC, as amended, reveals that ownership or control by the foreign government, as required under the provision, is not limited to direct ownership or control. No specific kind of ownership or control (whether direct or indirect) is required under the law. The phrase "directly owned, controlled, or directly enjoying refinancing" supplied in the subject Ruling is undoubtedly more restrictive than the phrase "owned, controlled, or enjoying refinancing" as written in the NIRC, as amended. As such, the Ruling has actually departed from the letter of the NIRC, as amended, stating that income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by financing institutions owned, controlled, or enjoying refinancing from foreign governments shall be exempt from taxation. Secondly, BIR also stated that SNPIN has not showed that it is a financial institution as contemplated by law. Thus, it declared: "It does not even show that SNPIN is a financial institution in contemplation of law." Section 2 of Revenue Regulations (RR) No. 09-04 provides a definition of the term "Financial Institution" as follows: "Section 2. Definition of Terms. 2.1. Financial Institution shall refer to banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries including finance companies. This does not, however, include insurance companies." Moreover, Section 22 (W) of the NIRC, as amended, defines "non-bank financial intermediary" and "quasi-banking activities" as follows: "SEC. 22. Definitions. When used in this Title: xxx xxx xxx. (W) The term 'non-bank financial intermediary' means a financial intermediary, as defined in Section 2(D)(C) of Republic Act No. 337, [7] as amended, otherwise known as the " General Banking Act ," authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking activities. (X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more personal or corporate lenders at any one time, through the issuance, endorsement, or acceptance of debt instruments of any kind other than deposits for the borrower's own account, or through the issuance of certificates of assignment or similar instruments, with recourse, or of repurchase agreements for purposes of relending or purchasing receivables and other similar obligations: Provided, however, That commercial, industrial and other non-financial companies, which borrow funds through any of these means for the limited purpose of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking functions. ISHCcT xxx xxx xxx." Under Section 2-D (c) of Presidential Decree No. 71, amending the General Banking Act, it defines "Financial intermediaries" as follows: "Section 2. xxx xxx xxx. Sec. 2-D. (c) 'Financial intermediaries' shall mean persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others"; As the comprehensive authority on the subject matter, Section 4101Q.1 of the Bangko Sentral ng Pilipinas (BSP) Manual of Regulations for Non-Bank Financial Institutions establishes the requisites for a person or entity to be considered a "financial intermediary," thus: " 4101Q.1 Financial intermediaries Financial intermediaries shall mean persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them either for their own account or for the account of others. Principal shall mean chief, main, most considerable or important, of first importance, leading, primary, foremost, dominant or preponderant, as distinguished from secondary or incidental. Functions shall mean actions, activities or operations of a person or entity by which his/its business or purpose is fulfilled or carried out. The business or purpose of a person or entity may be determined from the purpose clause in its articles of incorporation/partnership, and from the nature of the business indicated in his/its application for registration of business filed with the appropriate government agency. To be considered a financial intermediary, a person or entity must perform any of the following functions on a regular and recurring, not on an isolated basis: a. Receive funds from one (1) group of persons, irrespective of number, through traditional deposits, or issuance of debt or equity securities; and make available/lend these funds to another person or entity, and in the process acquire debt or equity securities; b. Use principally the funds received for acquiring various types of debt or equity securities; c. Borrow against, or lend on, or buy or sell debt or equity securities; d. Hold assets consisting principally of debt or equity securities such as promissory notes, bills of exchange, mortgages, stocks, bonds, and commercial papers; e. Realize regular income in the nature of, but need not be limited to, interest, discounts, capital gains, underwriting fees, guarantees, fees, commissions, and service fees, principally from transactions in debt or equity securities or by being an intermediary between suppliers and users of funds. CAacTH Non-banking financial intermediaries shall include the following: 1. A person or entity licensed and/or registered with any government regulatory body as a non-bank financial intermediary, such as investment house, investment company, financing company, securities dealer/broker, lending investor, pawnshop, money broker, fund manager, cooperative, insurance company, non-stock savings and loan association and building and loan association. 2. A person or entity which holds itself out as a non-banking financial intermediary, such as by the use of a business name, which includes the term financing, finance, investment, lending and/or any word/phrase of similar import which connotes financial intermediation, or an entity which advertises itself as a financial intermediary and is engaged in the function(s) where financial intermediation is implied. 3. A person or entity performing any of the functions enumerated in Items a to e of this Subsection." With respect to SNPIN, its Articles of Association expressly enumerates the objectives of the company. In Article 3 thereof, it provides, among others, that SNPIN's objectives include: a. to acquire, hold and dispose of shares, participations and other interests in legal entities, companies and enterprises, as well as to cooperate with them, either jointly with others or otherwise; b. to (cause third parties to) take out and to (cause third parties to) grant money loans and/or credits, to bind itself as (several) co-debtor or to stand surety for and to take a financial interest in any other way in other legal entities, companies and enterprises, as well as to provide securities in any other way (such as guarantees and mortgages), for debts of third parties; c. to act as a financing institution towards its subsidiary companies in the way of lending money or provide credit on such terms as may seem expedient and with or without security; d. to invest monies in equity value, the foregoing in the widest sense of the word; e. to receive funds from its ultimate investors, which are both owned and funded by the Kingdom of Norway, allocated for investment, and invest and reinvest those funds; and f. to manage funds as a global investor in all asset classes, including but not limited to equities, fixed income, treasury, real estate, money market, private equity and other investments in renewable power production facilities with focus on hydropower. In addition, SNPIN is registered with the Netherlands Chamber of Commerce and its corresponding Business Register Extract discloses the activities of the company, which is SBI (Standard Business Indicator)-Code: 6420 Financial Holdings. Upon analyzing and comparing the above definition of a "financial institution" and the business registration and other documents provided by SNPIN, we resolve that SNPIN fails to satisfactorily comply with the requisites to fall under the classification of a "financial institution" as contemplated by law. First, SNPIN has not proven that it actually performs any of the activities of a "financial intermediary" enumerated above as its principal function and on a regular and recurring basis. IAETDc Second, such person or entity must likewise be performing quasi-banking functions as defined above. In this regard, SNPIN failed to satisfy such requirement as well. Lastly, SNPIN's SBI Code classifies the activity of the company as "Financial Holdings." SNPIN may be considered more of a holding company rather than a non-bank financial intermediary. A holding company has been defined by the Securities and Exchange Commission (SEC) in several of its opinions. It has been aptly defined as "a corporation organized to hold the stock of another or other corporations." Its essential feature is that it holds stock. In line with the foregoing, we concur with the BIR that SNPIN is not entitled to exemption from Philippine income tax and withholding tax on its income received from its investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on its deposits in banks in the Philippines pursuant to Section 32 (B) (7) (a) (ii) of the National Internal Revenue Code (NIRC) of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Thank you. Sincerely yours, (SGD.) CARLOS G. DOMINGUEZ Secretary of Finance