Amendments to NIRC Re: Final Tax on Interests Derived from Commercial Paper

June 3, 1977

PRESIDENTIAL DECREE NO. 1154

FURTHER AMENDING CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, SO AS TO IMPOSE A FINAL TAX ON THE INTERESTS DERIVED FROM EVERY COMMERCIAL PAPER ISSUED IN THE PRIMARY MARKET

WHEREAS, there is a need to improve the administrative provisions of the National Internal Revenue Code so as to ensure the collection of the tax on interest derived from commercial papers issued in the primary market as principal instrument;casia

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers in me vested by the Constitution, do hereby order and decree:

SECTION 1. The National Internal Revenue Code, as amended, is hereby further amended by adding a new section thereto to read as follows:

"Sec. 195-C. Tax on certain interest.— There shall be levied, assessed, collected and paid on every commercial paper issued in the primary market as principal instrument, a transaction tax equivalent to thirty-five per cent (35%) based on the gross amount of interest thereto as defined hereunder, which shall be paid by the borrower/issuer: Provided, however, that in the case of a long-term commercial paper whose maturity exceeds more than one year, the borrower shall pay the tax based on the amount of interest corresponding to one year, and thereafter shall pay the tax upon accrual or actual payment (whichever is earlier) of the untaxed portion of the interest which corresponds to a period not exceeding one year.

"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."

"For purposes of this tax —

"(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 assignments, certificates of participations, and such other debt instruments issued in the secondary market. casia

"(b) The term "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 parts of the charges imposed as a consequence of the use of money.

"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 or renewal 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.

"The tax herein imposed shall be remitted by the borrower to the Commissioner of Internal Revenue or his Collection Agent in the municipality where such borrower has its principal place of business within five (5) working days from the issuance of the commercial paper. In the case of long term commercial paper, the tax upon the untaxed portion of the interest which corresponds to a period not exceeding one year shall be paid upon accrual payment, whichever is earlier."

SECTION 2. Section 29 (b) of the National Internal Revenue Code, as amended, is hereby further amended by adding a new paragraph thereto to read as follows:

"Sec. 29 (b). Exclusions from gross income. — cd i

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"(8) Interest earned on commercial papers issued in the primary market as principal instrument subjected to the final tax under Section 195-C."

SECTION 3. Section 77 of the National Internal Revenue Code, as amended is hereby further amended by adding a new paragraph thereto to read as follows:

"Sec. 77. Information at source as to payments of one thousand eight hundred pesos or more.

xxx xxx xxx

"However, such information return shall not be required in case of payment of interest on commercial papers, regardless of amount, upon which the transaction tax imposed under Section 195-C has been paid."

SECTION 4. Upon the recommendation of the Commissioner of Internal Revenue and in consultation with the Monetary Board of the Central Bank of the Philippines, the Secretary of Finance shall promulgate rules and regulations to implement the provisions of this Decree.

SECTION 5. This Decree shall take effect and shall be applicable to paid or accrued interest on commercial papers issued on or after approval of this Decree.

DONE in the City of Manila, this 3rd day of June, in the year of Our Lord, Nineteen Hundred and Seventy-Seven.

 

ATTACHMENT

 

SUBJECT : Proposal to impose a final tax of 35% on certain interest and providing for the manner of collection thereof .acd

HIGHLIGHTS AND JUSTIFICATIONS OF PROPOSAL

I. RECOMMENDATION

To impose a tax on commercial papers used as principal instrument issued in the primary market at the rate of 35% based on the gross amount of interest stipulated in the aforesaid instrument. The said tax shall be —

(1) assumed by the borrower thereby exempting the lender;

(2) a final tax;

(3) allowed as a deductible item for purposes of computing the borrower's taxable income.

II. JUSTIFICATION

(1) The proposal is aimed primarily to improve the administrative provisions of the National Internal Revenue Code to ensure the collection on the tax on interest on commercial papers used as principal instruments issued in the primary market. Presently, the Bureau has no means of enforcing strictly the taxation on interest income earned in the money market transactions. aisa dc

(2) The proposal would mean an increase in revenue of the government approximating P100 Million. The proceeds would boost the socio-economic development of the government.

III. REVENUE ESTIMATES

The proposal would amount to an increase in revenue estimated at P100 Million.

Published in the Official Gazette, Vol. 73 No. 36, 8350-1 Supp., on September 5, 1977.