Imposition of tax on interest derived from commercial papers issued in the primary market

June 3, 1977 REVENUE REGULATIONS NO. 07-77 SUBJECT : Imposition of tax on interest derived from commercial papers issued in the primary market TO : All internal revenue officers and others concerned Pursuant to the provisions of Section 326, in relation to Section 4 of the National Internal Revenue Code of 1977, these regulations are hereby promulgated to govern the manner of taxation of interest derived from commercial papers issued in the primary market. SECTION 1. Scope . Initially, only issues by corporations of commercial papers in the primary market as money market instruments shall be covered by these regulations. Excluded therefrom are corporate issues of commercial papers for all other purposes, e.g., installment loans for consumer goods financing, capital goods financing, traditional borrowing thru loans and discount financing (including promissory notes covering loans secured from the Government Service Insurance System, Social Security System and like institutions), IOUs issued to pawnshops, and non-corporate issues of commercial papers. SECTION 2. Definition of terms . For the purpose of these regulations, unless the context otherwise indicates, the following definitions of terms are hereby adopted: (a) "Commercial paper" shall be defined as an instrument evidencing indebtedness of any person or entity, including banks and non-banks performing quasi-banking functions, which is issued, endorsed, sold, transferred or in any manner conveyed to another person or entity, either with or without recourse and irrespective of maturity. Principally, commercial papers are promissory notes and/or similar instruments issued in the primary market and shall not include repurchase agreements, certificates of assignment, certificates of participation, and such other debt instruments issued in the secondary market. (b) "Interest" shall mean the difference between what the principal borrower received and the amount it paid upon maturity of the commercial paper which shall in no case be lower than the interest rate prevailing at the time of the issuance or renewal of the commercial paper. Interest shall be deemed synonymous with discount and shall include all fees, commissions, premiums and other payments which form integral part of the charges imposed as a consequence of the use of money but does not include registration fees, mortgage redemption insurance premium and documentary and science taxes. (c) "Promissory note" shall be defined as a commercial paper issued in the primary market as a money market instrument in accordance with the provisions of Presidential Decree No. 678 whether or not registered with the Securities and Exchange Commission and shall include promissory notes issued for corporate demand or call loans except as herein otherwise provided. SECTION 3. Imposition of tax . Every promissory note and/or similar instruments issued as a commercial paper in the primary market as a money market instrument shall be subject to the transaction tax of 35% based on the gross amount of interest as herein defined: Provided, however , That promissory notes issued by an entity availing itself of credit facilities of the Central Bank of the Philippines, Development Bank of the Philippines, Land Bank of the Philippines, and such other government institutions as may be authorized to extend the same, and promissory notes issued for interbank loans, including those between or among quasi-banks, shall not be subject to the tax herein imposed. Debt instruments issued in the secondary market such as repurchase agreements, certificates of assignment, certificates of participation and/or similar instruments are exempt from the transaction tax herein imposed provided that the underlying debt instrument has been previously taxed under Presidential Decree No. 1154. The transaction tax shall become due once the promissory notes is issued, renewed or extended regardless of the manner of payment of interest agreed upon. SECTION 4. Manner of computation of tax base . For purposes of Section 3 above, the tax base shall be the gross amount of interest paid or accrued on promissory notes issued and/or similar instruments. In the case of a promissory note discounted by the lender, "interest" shall be the difference between what the principal borrower received and the amount it paid upon the maturity of the commercial paper. In the case of a promissory note with a maturity of more than 365 days, the tax base shall be the amount of interest corresponding to one year from the date of issuance. Thereafter, the untaxed portion of the interest, which must likewise correspond to a period not exceeding one (1) year, shall be considered as the tax base upon which the transaction tax shall be imposed and paid in accordance with Section 7 hereof. In all cases where no interest rate is stated or if the rate stated is lower than the prevailing interest rate at the time of the issuance, renewal or extension of commercial paper, the Commissioner of Internal Revenue, upon consultation with the Monetary Board of the Central Bank of the Philippines, shall adjust the interest rate in accordance herewith and assess the tax on the basis thereof. SECTION 5. Finality of tax . The transaction tax imposed in this section shall be a final tax to be paid by the borrower and shall be allowed as a deductible item for purposes of computing the borrower's taxable income in the taxable year paid. The borrower shall not be required to accomplish the information return (B.I.R. Form No. 170IB) required under Section 77 of the National Internal Revenue Code of 1977 showing among others, the names, addresses and taxpayer account numbers of the recipients of interest payments on commercial papers upon which the herein transaction tax has been imposed. However, the borrower shall accomplish the information return mentioned above to cover all other interest payments on commercial papers upon which no transaction tax has been imposed in accordance with existing law. SECTION 6. Treatment of interest on commercial paper . Interest earned on a promissory note issued in the primary market as a money market instrument upon which the transaction tax provided for in Section 210(b) of the Tax Code of 1977 has been imposed shall not be included in the determination of gross income of the lender for the purpose of income taxation. If the recipient is a bank or a non-bank performing quasi-banking functions, the aforesaid amount of interest shall be subject to the five (5%) per cent gross receipts tax imposed by Section 260 of the Tax Code of 1977. However, as regards interest earned on commercial papers upon which no transaction tax has been imposed, such as treasury bills , the lender/placer shall declare the interest earned as part of its gross income in determining its taxable income and shall pay the corresponding income tax due thereon in accordance with existing laws. Only interest paid by the borrower or accrued during the taxable year can be deducted for income tax purposes in conformity with the accounting method of the taxpayer. SECTION 7. Manner of filing returns and payment of taxes . Within five (5) working days from the issuance of the commercial paper and in the case of a commercial paper with a maturity of more than 365 days, within five days from date of issue and within five days after every year thereafter, the borrower shall file a return covering all interest on the commercial paper issued and pay the tax due thereon to the Commissioner of Internal Revenue, Revenue Regional Director, Revenue District Officer or the Collection Agent of the city or municipality where the corporation's principal office is located and where its books of accounts and other data from which the return is prepared are kept. For this purpose, B.I.R Form No. 25.26 shall be used. SECTION 8. Statement to be attached to the corporate tax return of borrower . There shall be attached to the corporate tax returns (B.I.R. Form No. 17.02) of the borrower for each taxable year a statement (B.I.R. Form No. 25.26A) setting forth in summarized form the pertinent information required with respect to the total interest and taxes paid during the year. SECTION 9. Declaration under penalties of perjury . The returns required under these regulations shall contain a written declaration that they have been made under the penalties of perjury. Any person who willfully files a return containing information which is not true and correct as to every lender shall, upon conviction, be subject to the penalties prescribed for perjury under the revised Penal Code. SECTION 10. Penalties . Where the amount shown by the taxpayer to be due on its return or part of such payment is not paid on or before the date prescribed for its payment, the amount of the tax shall be increased by twenty-five (25%) per centum, the increment to be a part of the tax and the entire amount shall be subject to interest at the rate of fourteen (14%) per centum per annum from the date prescribed for its payment. In the case of willful neglect to file the return within the period prescribed herein or in case a false or fraudulent return is willfully made, there shall be added to the tax or to the deficiency tax in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty (50%) per centum of its amount. The amount so added to any tax shall be collected at the same time and in the same manner and as part of the tax unless the tax has been paid before the discovery of the falsity or fraud, in which case the amount so added shall be collected in the same manner as the tax. In addition to the above administrative penalties, the criminal and civil penalties as provided for under Section 337 of the Tax Code of 1977 shall be imposed for violation of any provision of Presidential Decree No. 1154. SECTION 11. Records to be maintained . Every borrower shall maintain records as well as all supporting data used in compiling the summary statement required to be filed under Section 7 hereof which must be made readily available at its principal place of business. SECTION 12. Effectivity . This regulation shall take effect as of the date of effectivity of Presidential Decree No. 1154. aisa dc CESAR VIRATA Secretary of Finance Recommended by: EFREN I. PLANA Acting Commissioner ANNEX A INSTRUCTIONS A. WHO MUST FILE . The return shall be filed in duplicate by every corporate borrower which issues promissory notes as a commercial paper in the primary market as money market instruments subject to the transaction tax imposed by Presidential Decree No. 1154. B. WHERE TO FILE . This return must be filed with the Commissioner of Internal Revenue, Revenue Regional Director, Revenue District Officer or the Collection Agent of the City or Municipality where the borrower's principal office is located and where its books of accounts and other data from which the return is prepared are kept. C. WHERE AND WHERE TO PAY . Upon filing the return, the tax due must be paid to the Collection Agent. In places where payment through banks is the prescribed procedure, payment must be made to any authorized agent bank. The return must be filed in duplicate and the tax paid as follows: 1. Commercial papers with maturity date of 365 days or less Within five (5) working days from the issuance, renewal or extension of the commercial paper; 2. Commercial papers with maturity date of more than 365 days Within five (5) working days from the issuance, renewal or extension of the commercial paper and within five (5) days after every year thereafter. IMPORTANT: An annual statement under BIR Form No.______ showing all interest payments and transaction tax remittances shall be attached to the borrower's annual corporate income tax return. (BIR Form No. 1702). INSTRUCTIONS This annual statement shall be accomplished by any corporate borrower which issues promissory notes and/or similar instruments as a commercial paper in the primary market as money market instruments subject to the 35% transaction tax imposed by Presidential Decree No. 1154. The corporation shall summarize under this statement its total monthly borrowings effected through the money market during the preceding taxable year showing among others the principal amount of the promissory notes issued, total interests subjected to the transaction tax and the amount of tax remitted to the Bureau of Internal Revenue. This statement shall be attached by the corporation to its annual corporate income tax return (BIR Form No. 1702), in addition to other schedules required to be attached therewith by existing laws, rules and regulations.