Publishing Additional Questions and Answers on the Interpretation of the Provisions of the National Internal Revenue Code, as Implemented by Revenue Regulations Nos. 16-84 and 17-84 and, Revenue Memorandum Circular No. 27-84

September 16, 1985 REVENUE MEMORANDUM CIRCULAR NO. 39-85 SUBJECT : Publishing Additional Questions and Answers on the Interpretation of the Provisions of the National Internal Revenue Code, as Implemented by Revenue Regulations Nos. 16-84 and 17-84 and, Revenue Memorandum Circular No. 27-84 TO : All Internal Revenue Officers and Others Concerned The following are additional questions and answers on each particular topic enumerated below, which were taken up in a series of conferences between Banker's Association of the Philippines (BAP), the Philippine Association of Finance Companies, Inc., the Philippine Association of Securities, Brokers and Dealers, the Investment Houses Association of the Philippines and the BIR Committee on Banks. "I. On Documentary Stamp Tax (DST) Question 1. What is the DST on the sale (with or without recourse) of government securities or promissory notes? Ans . Sec. 225, NIRC provides for the stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfers of bonds, due bills, certificates of obligation (including government securities, like T-bills) or shares of certificates of stock of P0.50 on each P200.00, or fractional part of the value of the instrument. casia Question 2. Are all deposit substitutes/debt instruments, whether or not payable at sight or demand, subject to DST under Sec. 229, NIRC, as amended? Ans . Yes, except as provided for in Sec. 248 to the effect that "when any bond, note or other obligation is secured by a mortgage, pledge, deed of trust, or by the assignment or transfer of any documentary security, one tax only shall be collected upon these papers, the tax to be at the highest rate imposed on the mortgage, bond, note, obligation or other documents, as the case may be." Question 3. What is the new DST rate for deeds of assignment? Ans . Same answer as to Question No. 1, above. Question 4. Has Sec. 248, NIRC been amended by P.D. 1959? Ans . No. Sec. 248 of the NIRC, has not been amended by P.D. 1959. Question 5. Are forward contracts executed between the Central Bank or local banks with corporations or individuals subject to DST? Ans . Yes. Sec. 231, NIRC, provides for a stamp tax on foreign bills of exchange and letters of credit at P0.30 on each P200.00 or fractional part thereof of the face value of the instrument. cd i Question 6. Are foreign currency contracts executed by FCDUs/OBUs still exempt from DST? Ans . Yes. Finance Ministry Order No. 39-84 states that "the withdrawal of exemptions from, or any preferential treatment in, the payment of duties, taxes, fees, imposts and other charges as provided for under P.D. 1955, does not apply to exemptions or preferential treatment embodied in the following laws: a. The National Internal Revenue Code, as amended; b. The Tariff and Customs Code, as amended; c. The Local Tax Code, as amended; and d. The Real Property Tax Code." However, notwithstanding the above, the same order also stated that "any exemption from or preferential treatment in the tax on interest income from bank deposits and yield or any other monetary benefit from deposit substitutes, trust funds and other similar arrangements shall remain withdrawn" and therefore, taxable under Sections 21 (d), 24(cc) and 53(d) (1) of the Tax Code, effective October 15, 1984. II. On Revenue Regulations No. 16-84 re : The Additional One Percent (1%) Tax on the Gross Value Received by Banks, Non-Bank Financial Intermediaries and Authorized Foreign Exchange Dealers. Question 1. On a foreign draft drawn in a local bank but presented or negotiated by the beneficiary in another local bank, which bank shall be liable to the 1% excise tax on foreign exchange transactions? Ans . The bank which exchanges pesos for the foreign currency draft. Question 2. Are expenses of seconded bank officers in overseas subsidiaries (i.e. amortizations of local accounts, SSS, Medicare, etc.) paid by the local parent company, and reimbursed by the foreign subsidiary via its foreign currency deposit with the local company or issuance of a foreign currency draft, subject to the 1% tax? Ans . Yes, upon reimbursement in foreign currency of the peso expenses, based on gross and on a per transaction basis. Question 3. Are foreign currency contracts booked prior to October 15, 1984, but had to be rolled over because of moratorium and payment which will be made after October 15, 1984 be subject to the 1% tax? Ans . Yes. Payments on or after October 15, 1984 are subject to the 1% tax. Question 4. If the buyer or seller in the purchase or sale of foreign currency for pesos are quasi-banks or financing companies, will the 1% tax be applicable? Ans . Yes. Only transactions entered into by the Central Bank with local commercial banks and foreign banks, as well as transaction by and among such banks are exempt. Question 5. Are transactions involving financial futures of the like, wherein the bank takes a position in a certain foreign currency through a foreign exchange broker subject to the 1% tax? This usually involve an actual inflow or outflow of foreign currency with the recognition of gain or loss item in pesos in our book of accounts. Ans . No. Only transactions in foreign currency where there is an actual sale/purchase of foreign currency for pesos are covered by the 1% tax. Mere conversion to pesos for financial accounting purposes is not subject to the 1% tax. Question 6. Is the purchase or sale of foreign currency denominated securities made by banks subject to the 1% tax? Ans . Yes, if said purchases or sale of foreign currency denominated securities is made in peso and no, if the purchase or sale is also in foreign currency. Question 7. If foreign currency denominated notes/securities are purchased by a bank from a non-bank foreign exchange dealer, will the transaction be subject to the 1% tax? If so, the same foreign currency denominated securities would have been taxed twice, i.e.; purchases of foreign currency by a foreign exchange dealer and again when these are sold by the same foreign exchange dealer to the bank. Ans . The sale or purchase of foreign currency notes/securities by a non-bank foreign exchange dealer are subject to the 1% tax for every sale or purchase where the peso is the medium of exchange because these are not the exempt cases, i.e., interbanks transactions between and among Central Bank, local commercial banks and other foreign banks. In the case, however, of an authorized foreign exchange Agent, acting as agent of the Central Bank when it purchases foreign currency notes/securities then surrenders the same to the Central Bank thru the authorized agent bank, as required by law, the authorized foreign exchange agent shall be taxable only upon purchase of the foreign exchange notes/securities and shall no longer be liable to the 1% tax when it sells to the Central Bank thru the authorized agent bank in exchange for pesos. Question 8. Are export bills sent on collection (due to discrepancies or due to usance terms) shipped prior to September 24, 1984 which were subjected to the economic stabilization tax also subject to the transaction tax when payment is received after October 15, 1984? acd Ans . If said export bills have been subjected to the 30% economic stabilization tax, there is no need to subject it to the 1% tax. Question 9. For foreign correspondent bank's charges debited to our accounts (in foreign currency) prior to October 15, 1984 by the debit advices of which were received by the local bank after October 15, 1984, will such foreign currency charges be subject to the 1% tax? Ans . No, since the payments are made in foreign currency, and the transactions are considered interbank transactions. Question 10. What about foreign correspondent bank's charges which are passed on by the local bank to the importer/borrower, are these charges subject to the 1% tax? Ans . Yes, because there is an actual sale of foreign exchange to the importer/borrower for which pesos were paid. Question 11. Does the 1% tax apply to the proceeds of forward exchange contracts executed before October 15, 1984 and delivered after this date, considering that actual delivery of contract proceeds consummates the sale? Ans . Yes. The tax shall be based on the contracted rate, both for foreign exchange forward contracts executed prior to or after October 15, 1984, and the tax is due upon delivery of the proceeds on or after October 15, 1984. Question 12. In the case of export bills purchased, will the tax be due on the date of purchase or on the date of actual credit or export proceeds to the account of the negotiating bank? In any case what rate shall be used in determining the gross peso value? Ans . For Onsight EBs the tax is due on the date of purchase. For Usance EBs - the tax is due upon credit of the proceeds. In both cases, the reference rate of date purchase shall be used in determining the gross peso value. Question 13. Are FCDU transactions subject to the 1% tax? Ans . Yes, if the withdrawal is made in pesos, but if the withdrawal is in foreign currency, it is not subject to the 1% tax. Question 14. As provided for in Rev. Reg. No. 16-84, the tax is payable on the first banking day of the succeeding week covering the transactions of the previous week. We find the remittance deadline too stiff and would request for a more reasonable deadline. Ans . Our recommendation has been approved by the Commissioner that for purposes of filing the required return and paying the 1% tax, a week is defined to be the period beginning on Thursday and ending on Wednesday of the succeeding calendar week, instead of from Monday to Friday. The filing of the return and payment of the 1% tax shall be made on the Monday or first banking day following the transaction period from Thursday to Wednesday. Question 15. Are forward transactions by oil and steel companies subject to the 1% transaction tax? Ans . Yes, effective October 15, 1984 on the sale/purchase of foreign exchange made in pesos. acd Question 16. Are forward exchange purchases in relation to swap loans extended by the bank, subject to transaction tax? Ans . No, because said transactions are considered interbank transactions between Banks and Central Bank. Question 17. Are there reports required other than the weekly return and remittance of taxes? Ans . None, so far. Question 18. Are foreign exchange purchases from correspondent banks abroad against pesos credited to their non-resident peso account with the local bank fall within the category of interbank transactions which are exempt from the 1% tax? Ans . Yes. Question 19. Are L/Cs opened prior to October 15, 1984 but negotiated on or after October 15, 1984 subject to the 1% tax? Ans . Yes, if payment (foreign currency purchased for pesos) is effected on or after October 15, 1984. Question 20. Are U.S. Treasury Warrants subject to the 1% tax? Ans . Yes, when converted to pesos. Question 21. In certain cases, negotiations under export letters of credit are restricted at the counters of the bank, say XYZ Bank. In this particular case, the exporter negotiates his export bill thru his own bank, say ABC Bank. As a matter of reciprocity, ABC Bank negotiates the export documents and pays the exporter the peso equivalent of the export bills. In turn, ABC Bank presents the documents to XYZ Bank and the latter issues its dollar draft in favor of the former. XYZ Bank then sends the documents to the L/C issuing Bank for collection. In the above case, it is clear that the ABC Bank is liable for the 1% tax at the time of original negotiation of the export documents. Will the export proceeds (upon final collection by XYZ Bank from the L/C issuing Bank still be subject to the 1% tax? In the affirmative, who shall shoulder the tax? Ans . Whoever receives the foreign currency and exchanges it for pesos. Question 22. Banks are now allowed to open cash Letters of Credit (spot sales of foreign exchange to importer clients). When is the 1% tax due? On the date of opening of the L/C or on the negotiation date? Ans . The 1% tax is due upon payment in pesos of the foreign exchange value of the L/C. Question 23. Are deposits/withdrawals of airline/shipping companies maintaining special dollar accounts with Central Bank subject to 1% tax? Ans . If the withdrawal is in foreign exchange, it is not subject, but if the deposits/withdrawals involve a peso equivalence, it is subject to the 1% tax. Question 24. Is the conversion of a foreign currency to another foreign currency subject to the 1% tax? Ans . No. It is only when the peso is involved in the exchange that the 1% tax attach. Question 25. Are embassies and their personnel subject to pay the 1% tax? Ans . The 1% tax is a tax on banks, non-bank financial intermediaries and foreign exchange dealers. The sale as purchase of foreign currency for pesos to or from embassies and its personnel are subject to the 1% tax. Question 26. If for some reason, a bill purchased by the bank is refused or rejected by the drawee/drawer and we have already paid the 1% tax, what is the procedure to follow in requesting for a refund? Ans . The claim for refund or tax credit should be pursued in accordance with Sec. 292. NIRC. Question 27. If the Republic of the Philippines and the Federal Republic of Germany have signed a Technical Cooperation Agreement whereby "the Government of the Republic of the Philippines shall levy no taxes or other fiscal charges on any emoluments paid from German public funds to German specialists or German construction and consulting firms for services rendered within the framework of the present agreement," will this provision be construed as an exception to the 1% Tax? Ans . No. The 1% tax is a tax on banks, non-bank financial intermediaries and foreign exchange dealers on the sale/purchase of foreign exchange and services for pesos. cdt Question 28. If a standby L/C has been issued by a German Bank such that funds will be disbursed by means of drawing under the L/C are, such drawings to be exempted from the 1% tax if the proceeds will be credited to the German entity's FCDU account? Ans . Drawings/withdrawals in pesos are subject to 1% tax. However, the transactions are not subject, if made also in foreign currency. Question 29. Are franchise holders, like the Tourist Duty Free Shops exempted from the 1% tax? Ans . No. Same answer as in Question No. II - 7 and 27, above, as may be applicable. Question 30. In the light of P.D. 1955 are transactions of EPZA registered companies exempted from the 1% tax? Ans . No. Same answer as in Question No. II - 7 and 27, above, as may be applicable. Question 31. Without charging grossed-up rates, can financial institutions be allowed to report for gross receipts tax and net income tax purposes only the actual amount earned, without adding the 1% tax assumed by the client? Ans . Yes. There will be no pyramiding of the 1% tax passed on to the client for the financial institution. Question 32. Since U.S. dollar interest income paid on U.S. dollar time deposits are exempt from the 1% tax, then an outright U.S. dollar payment remitted abroad by the local bank will likewise be exempt from said tax? Ans . Yes, so long as there is no peso conversion of the U.S. dollar remitted abroad. Question 33. What is meant by the term "official rate of exchange" mentioned in Sec. 2 of Rev. Reg. No. 16-84? Does this refer to the "buying rate" for exports and "selling rate" in the case of imports transactions? Ans . The official rate in the "guiding rate/reference rate" as determined by the Banker's Association of the Philippines on a day to day basis. Question 34. Can Banks pass on to its clients 1% tax, in the same way that hotels, contractors and restaurants pass on their percentage tax to their customers? Ans . The 1% tax is a tax on banks (see answer to Question No. II - 27, above). There is no prohibition for banks to pass on the 1% tax to their clients. III. On Revenue Regulations No. 17-84 re: Income Taxation of Interest Income Derived From Deposits and Yield From Deposit Substitutes: Question No. 1. How do you determine the effective date of 15% final withholding tax on investment management accounts, trust fund and similar arrangements? Is the date of execution/issue of the investment management/trust agreement, the date of receipt of the investment income by the trustee bank or investment manager, or the date of withdrawal/payment to the trustor/beneficiary or investors? Ans . The 15% final withholding tax shall be applied to all income paid, accrued or earned from or after October 15, 1984. Question 2. Are certificates of assignment/participation (with or without recourse) or confirmation of sale covering government securities, Treasury Bills and Central Bank Bills and commercial papers/promissory notes still subject to 15% final withholding tax, even if said government securities have been previously subjected to the 15% final withholding tax at the initial/original issuance? Ans . Income/yield of government securities, i.e., Treasury Bills and Central Bank Bills, which have already been subjected to the 15% final withholding tax at the initial/original issuance shall no longer be subject to the 15% final withholding tax under Rev. Reg. No. 17-84 when these are sold or assigned by the financial institution in the secondary market. Likewise, SEC registered commercial papers/promissory notes which are traded in the secondary market, shall be taxed only once, i.e., at initial original issuance, subject to an undertaking by the issuer and the selling agent, that the 15% final withholding tax has already been paid. Question. 3. Are traditional lendings by banks, investment companies and finance companies to the public be subject to the 15% final withholding tax? Ans . Yield or monetary benefit derived by banks, investment and finance companies on their traditional lendings are not subject to the 15% final withholding tax imposed by Sec. 24(cc) of the Tax Code, as amended by P.D. 1959, as implemented by Rev. Reg. No. 17-84. acd "Traditional lending" has been defined as one whereby a loan granted is evidenced by the lending institution's non-negotiable promissory note, as well as those evidenced by negotiable promissory notes required for re-discounting with the Central Bank and the Development Bank of the Philippines. Likewise, the following traditional finance company activities are exempt from the 15% final withholding tax: 1. Extending credit facilities to consumers and to industrial, commercial or agricultural enterprises by: 1.1 granting direct loans or by discounting or factoring commercial papers or account receivables for profit; or 1.2 buying and selling contracts, leases chattel mortgages, account receivables and other evidence of indebtedness; or 1.3 leasing of motor vehicles, heavy equipment and industrial machinery, business and office machines and equipment, appliances and other movable or immovable property. Question 4. Section 12 of Rev. Reg. No. 17-84 states that said regulations shall take effect as to "interest and/or yield on deposit substitute instruments issued beginning October 15, 1984." However, we received a clarificatory letter, dated October 22, 1984 from BAP saying that the 15% final tax is applicable to transactions beginning October 15, 1984. We take it to mean that if you have a placement, say October 1 to October 14, 1984 the rate is 20%, then from October 15 to 31, 1984 the rate applicable is 15%. Please clarify. Ans . The 15% final withholding tax is applicable to transactions beginning October 15, 1984. Meaning that if you have a placement say October 1 to 31, 1984, the tax rate applicable from October 1 to October 14 is 20%; and from October 15 to 31, 1984 the tax rate applicable is 15%. Question 5. Are lendings by banks to the public evidenced by commercial papers subject to the 15% final withholding tax? Ans . Yes, except on "traditional lendings", as defined (See answer to Question No. 3, above). Question 6. Is the withholding tax based on the number of times a paper is turned around or is the paper taxed only once and that is an original issue? Ans . Same answer as in Question No. III - 2, above. Question 7. Will all issuers of commercial papers (defined as any evidence of indebtedness less than 360 days) and other evidences of indebtedness (long-term as 361 day or over) withhold the 15% final withholding tax? Ans . Yes, except "traditional lendings" by banks and financial institutions, as well as negotiable promissory notes of lending institutions used for rediscounting with the Central Bank and the Development Bank of the Philippines. Question 8. Are previously exempt entities also exempted from Rev. Reg. No. 17-84? Ans . No. As stated in Ministry of Finance Order No. 39-84, any exemption from or preferential treatment in the tax on interest income from bank deposits and yield or any monetary benefit from deposit substitutes, trust funds and similar arrangements shall remain withdrawn pursuant to Sections 21(d), 24(cc) and 53(d) (1) of the Tax Code. Question 9. Are there depositors who are not subject to the payment a final tax on interest from deposits and yield or any monetary benefit from deposit substitutes and from trust funds and similar arrangements? Ans . None, except income from deposits maintained in foreign currency. See Ministry of Finance Order No. 39-84 in answer to Question No. III-11, below. acd Question 10. Will there be new BIR forms of Withholding tax returns? Ans . BIR forms are being revised. Question 11. Will educational foundations, trust funds, retirement plans and other organizations of the same objectives/goals still enjoy any tax privilege? If there are any, to what extent? Ans . Ministry of Finance Order No. 39-84 provides that the withdrawal of exemptions from, or any preferential treatment in the payment of duties, taxes, fees, imposts and other charges as provided for under P.D. 1955 does not apply to exemptions or preferential treatment embodied in (a) the National Internal Revenue Code (b) Tariff and Customs Code, (c) Local Tax Code, and (d) Real Property Tax Code. However, in the case of income from interest from bank deposits and yield or any monetary benefit from deposit substitutes, the exemptions and preferential tax treatments shall remain withdrawn. They shall be subject to the 15% final withholding tax (See Rev. Memorandum Circular No. 31-84). Question 12. Is there a new payment/remittance procedure? Ans . Rev. Regulations No. 3-85 is the latest. Question 13. Can there be a reconsideration for interbank borrowings as to the term of loan? In practice there are term transactions for about 7 to 15 days which are also sourced to meet reserve deficiencies so as to avoid daily borrowings at the market. Ans . No. None as of date. Question 14. (a) How will the 15% final withholding tax apply to money market as deposit substitute placements made prior to October 15, 1984, the maturity date of which is after October 15, 1984? (b) Will the interest/discount of tax-exempt government securities issued prior to October 15, 1984 and presently still outstanding be subject to the 15% final withholding tax? Ans . For money market as deposit substitute placement made prior to October 15, 1984, the maturity of which is after October 15, 1984, the tax shall be applied as follows: a) For those placements not previously classified as deposit substitutes under the old law/regulations and therefore the income thereon is not subject to the 20% final withholding tax shall continue to be not subject to the final withholding tax whether the income were earned prior to or after October 15, 1984, so long as said placements were made prior to October 15, 1984. b) Those placements classified as deposit substitutes under the old law/regulation and therefore were subject to the 20% final withholding tax on income earned or accrued up to October 14, 1984. On income earned or accrued on or after October 15, 1984, the same shall be subject to the 15% final withholding tax. Question 15. How does the 15% final withholding tax apply to income/revenue from bonds/bills/securities (CBCI, PWED, EPZA, MERALCO, CFC, etc.) issued prior to October 15, 1984 and were subject to 15% creditable withholding tax? Ans . Income/revenue earned or accrued from October 15, 1984 until maturity of said public or private bonds/securities, shall be subject to 15% final withholding tax and therefore no longer subject to Net Income Tax. However, such income/revenue shall remain subject to GRT. acd All internal revenue officers and others concerned are enjoined to give this Revenue Memorandum Circular the widest publicity possible. (SGD.) RUBEN B. ANCHETA Acting Commissioner TAN A5239-J1139-A-O