PROVIDING FISCAL INCENTIVES BY AMENDING CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AND FOR OTHER PURPOSES

• Number: Presidential Decree No. 1739
• Sections: 22

Preamble

WHEREAS, studies and surveys indicate the need for more

long-term funds to support the investment and credit requirements of industry

and agriculture; and

WHEREAS, the laws restructuring the banking system to allow

it to re-channel its resources to long-term investments require a complementary

change in the applicable tax structure to provide adequate incentives for

long-term funds;

NOW, THEREFORE, I, FERDINAND E. MARCOS, by virtue of the

powers vested in me by the Constitution, do hereby decree and order:

Section 1

SECTION 1. Section 20 of the National Internal Revenue Code

is hereby amended by adding the following definitions as follows:

“SEC. 20 (v) The term “bank” means every banking institution

as defined in Section 2 of the General Banking Act, Republic Act 337, as

amended. A bank may either be a commercial bank, a thrift bank, a development

bank, a rural bank or a specialized government bank.

(w) The term “non-bank financial intermediary” means financial intermediary

as defined in Section 2-D(c) of the General Banking Act R.A. No. 337, as

amended, authorized by the Central Bank of the Philippines to perform

quasi-banking activities.

(x) The term “quasi-baking activities” means borrowing funds from twenty or

more personal or corporate lenders at any one time, through the issuance,

endorsement or acceptance of debt instrument of any kind other than deposits for

the borrower’s own accounts, or through the issuance certificates of assignment

or similar instruments, with recourse, or of repurchase agreements for purposes

of relending or purchasing receivable 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.”

Section 2

SEC. 2. Section 21 of the same Code is hereby amended by

adding a new paragraph to read as follows:

“SEC. 21. Rates of tax on citizens or residents.

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xxx xxx xxx

Interest from Philippine Currency bank deposits and yield from deposit

substitutes whether received by citizens of the Philippines to the final tax as

follows:

(a) 15% of the interest on savings deposits, and (b) 20% of the

interest of time deposits and yield from deposit substitutes, which shall be

collected and paid as provided in Sections 53 and 54 of this Code:

Provided, That no tax shall be imposed if the aggregate amount of the

interest on all Philippine Currency deposit accounts maintained by a depositor

alone or together with another in any one bank at any time during the taxable

period does not exceed Eight Hundred Pesos (P800.00) a year or Two Hundred Pesos

(P200.00) per quarter; Provided, further, That if the recipient of such

interest is exempt from income taxation, no tax shall be imposed and that, if

the recipient is enjoying preferential income tax treatment then preferential

tax rates income tax treatment then the preferential tax rates so

provided shall be imposed.”

Section 3

SEC. 3. Section 24 of the same Code is hereby amended by

adding a new subsection (cc) between subsections (c) and (d) to read as

follows:

“(cc). Rates of tax on interest from deposits and yield from deposit

substitutes. Interest on the Philippine Currency bank deposits and yield from

deposit substitutes received by domestic or resident foreign corporations shall

be subject to a final tax on the total amount thereof as follows: (a) 15% of the

interest on savings deposits; and (b) 20% of the interest on time deposits and

yield from deposit substitutes which shall be collected and paid as

provided in Sections 53 and 54 of this Code: Provided, That if

the recipient of such interest is exempt from income taxation, no tax shall be

imposed and that, if the recipient is enjoying preferential income tax

treatment, then the preferential tax rates so provided shall be

imposed.

Section 4

SEC. 4. Section 24(e) of the same Code is hereby amended by

adding a new paragraph to read as follows:

“SEC. 24(e). The foregoing provisions shall not apply to

banks, non-bank financial intermediaries or corporations organized primarily,

and authorized by the Central Bank of the Philippines to hold shares of stocks

of bank unless – (A) more than twenty (20%) per cent of all classes of

stock entitled to vote of such corporation is held by: (i) persons related to

each other within the third degree of consanguinity or affinity, or (ii) a

corporation the majority of shares are owned by the same person or so related

persons.”

Section 5

SEC. 5. Section 25 of the same Code is hereby amended to

read as follows:

“SEC. 25. Additional tax on corporations improperly

accumulating profits or surplus. – (a) Imposition of tax. – If any

corporations is formed or availed of for the purpose of preventing the

imposition of the tax upon its shareholders or members or the shareholders or

members of another corporation, through the medium of permitting its gains and

profits to accumulate instead of being divided or distributed, there levied and

assessed against such corporation, for each taxable year, a tax equal to 25% of

the undistributed portion of its accumulated profits or surplus which shall be

in addition to the tax imposed by Section 24, and shall be computed, collected

and paid in the same manner and subject to the same provisions of law, including

penalties, as that tax.

“(b) Prima facie evidence. – The fact that any corporation is a mere

holding company shall be prima facie evidence of a purpose to avoid the tax upon

its shareholders or members. Similar presumption will lie in the case of an

investment company where at any time during the taxable year more than fifty per

centum in value of its outstanding stock is owned, directly or indirectly, by

one person.

“(c) Evidence determinative of purpose. – That fact that the

earnings or profits of a corporation are permitted to accumulate beyond the

reasonable needs of the business shall be determinative of the purpose to avoid

the tax upon its shareholders or members unless the corporation, by clear

preponderance of evidence, shall prove the contrary.

“(d) Exception. – The provisions of this section shall not apply to

banks, nonblank financial intermediaries, corporations organized primarily, and

authorized by the Central Bank of the Philippines to hold shares of stock of

banks, insurance companies, or personal holding companies, whether domestic or

foreign.

Section 6

SEC. 6. Paragraph (1) of Section 27 of the same Code is

hereby deleted.

Section 7

SEC. 7. Sub-paragraph (b) (8) (D) of Section 29 of the same

Code is hereby amended to read as follows:

“SEC. 29(b) (8) (D). Interest earned on Philippine Currency

bank deposits and yield from deposit substitutes subjected to the final tax

under Sections 21 and 24 of this Code.”

Section 8

SEC. 8. Section 34(g). The provisions of paragraph (b) of

this section to the contrary notwithstanding, net capital gains realized during

each taxable year by individuals or corporations from sale or exchange of shares

of stock shall be taxed at the rate of 10%: Provided, however, That net

capital gains realized from the sale defined in Section 96 of the Corporation

Code of the Philippines, shall be subject to tax as follows:

Not over P50, 000 . . . . . . . . . 10%

Over 50,000 . . . . . . . . . . .

. . . 20%

Capital losses sustained from the sale shares of stock in a close corporation

shall be allowed to be offset against capital gains from sale or exchange of

shares of stock in any corporation.

Capital losses sustained from the sale or exchange of shares of stock in a

corporation not qualifying as a close corporation shall be allowed to be offset

only against capital gains from sale of stock in a corporation not qualifying as

a close corporation.

The capital gains tax herein imposed shall be paid in a manner

provided for by regulations to be promulgated by the Minister of

Finance.

Section 9

SEC. 9. Section 53(e) of the same Code is hereby amended to

read as follows:

“SEC. 53(e) Withholding of the final tax on interest on

bank deposits and yield from deposit substitutes. –

(1) Withholding of final tax. Every bank or non-bank financial intermediary

shall deduct and withhold from the interest on bank deposits or yield from

deposit substitute a final bank equal to fifteen (15%) per cent of the interest

on savings deposits and twenty (20%) per cent of the interest on time deposits

or yield from deposit substitutes: Provided, however, That no

withholding tax shall be made if the aggregate amount of the interest on all

deposit accounts maintained by a depositor alone or together with another any

one bank at any time during the taxable period does not exceed Eight Hundred

Pesos a year of Two Hundred Pesos per quarter. For this purpose, interest on a

deposit account maintained by two persons shall be deemed to be equally owned by

them.

“(2) Depositors or placers/investors enjoying tax exemption privileges or

preferential tax treatment. – In all cases where the depositor or

placer/investor is tax-exempt or is enjoying preferential income tax treatment

under existing laws, the withholding tax imposed in the paragraph shall be

refunded or credited as the case may be upon submission to the Commissioner of

Internal Revenue of proof that the said depositor, or placer/investor is a tax

exempt entity or enjoys a preferential income tax treatment.

“(3) Manner of withholding. – Without divulging the names of the

depositors, or pacer/investors, the tax shall be withhold by the bank or

non-bank financial intermediary and paid in the same manner and subject to the

same conditions provided in Section 54 of this Code.”

Section 10

SEC. 10. Section 64(b) of the same Code is hereby amended to

read as follows:

“SEC. 64(b). Exceptions. The term “personal holding company”

does not include a corporation, firm or association exempt from taxes under

Section 11

SEC. 11. Section 187 of the same Code is hereby amended by

adding after subparagraph (aa) the following definitions:

“Section 187 –

(bb) The term “bank” shall have the same meaning as in Section 20(v) of this

Code.

(cc) The term “non-bank financial intermediary” shall have the same meaning

as in Section 20(w) of this Code.

(dd) The term “quasi-banking activities” shall have the same meaning in

Section 12

SEC. 12. Section 209 of the same Code is hereby amended to

read as follows:

“SEC. 209. Percentage tax on dealers in securities, lending

Investors shall pay a tax equivalent to five per centum on their gross

income.

Section 13

SEC. 13. Section 210 of the same Code is hereby

repealed.

Section 14

SEC. 14. Section 260 of the same Code is further amended to

read as follows:

“SEC. 260. Tax on banks and non-bank financial

intermediaries. – There shall be collected a tax on gross receipts derived

from sources within the Philippines by all banks and non-bank financial

intermediaries in accordance with the following schedule:

(a) On interest, commissions and discounts from lending activities as on the

basis of remaining maturities of instruments from which such receipts are

derived.

Short-term maturity - not in excess

of two (2) years

5%

Medium-term maturity over two(2)

years but not exceeding four (4)

years

3%

Long-term maturity -

(i)

over four (4) years but not exceeding seven (7) years

1%

(ii)

Over seven years

0%

(b)

on dividends

0%

(c)

On royalties, rentals of property , real or personal, profits

from

exchange and all other items treated as gross income under

Section 15

SEC. 15. Section 261 of the same Code is further amended to

read as follows:

“SEC. 261. Tax on finance companies. – There shall

be collected a tax of five per centum on the gross receipts derived by all

finances companies as well as other financial intermediaries not performing

quasi-banking functions, doing business in the Philippines from the interests,

discounts, and all other items treated as gross income under this Code:

Provided, That, interest, commissions and discounts from lending

activities, as well as income from financial leasing shall be taxed, on the

basis of remaining maturities of the instruments from which such receipts are

derived in accordance with the following schedule:

Short-term maturity - not in excess of two (2) years

5%

Medium-term maturity over two(2)

years but not exceeding four (4) years

3%

Long-term maturity -

(i)

over four (4) years but not exceeding seven (7) years

1%

(ii)

Over seven (7) years

0%

Provided, however, That in case the maturity period is shortened

thru pretermination, then the maturity period shall be reckoned to end as of the

date of pretermination for purposes of classifying the transaction as short,

medium or long term and the correct rate of tax shall be applied

accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same

tax herein provided on persons performing similar financing

activities.”

Section 16 Rules and regulations.

SEC. 16. Rules and regulations. – The Minister of

Finance, upon recommendation of the Commissioner of Internal Revenue and in

consultation with the Governor of the Central Bank of the Philippines, shall

promulgate the implementing rules and regulations for the effective achievement

of this Act.

Section 17 Repealing Clause.

SEC. 17. Repealing Clause. – All acts, laws,

decrees, executive orders, rules and regulations, or parts thereof, which are

contrary to or inconsistent with this law, are hereby repealed, amended or

modified accordingly.

Section 18 Effectivity.

SEC. 18. Effectivity. – This Act shall take effect

immediately.

Done in the City of Manila, this 17th day of September, in the year of Our

Lord, nineteen hundred and eighty.

(Sgd.) FERDINAND E. MARCOS

President of the

Philippines

By the President:

(Sgd.) JOAQUIN T. VENUS, JR.

Presidential Assistant

Section 20

Section 20(x) of this Code.

(ee) The term “finance companies” refers to corporations or partnerships

other than 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.”

Section 27

Section 27, a bank or non-bank financial intermediary, a corporation organized

primarily, and authorized by the Central bank, to hold shares of stocks of bank

pursuant to Sections 12-C of the General Banking Act, a life insurance company,

or a foreign personal holding company as defined in Section

67.”

Section 29

Section 29 of this code

5%

Provided, however, That in case the maturity period referred to in

paragraph (a) is shortened thru pretermination, then the maturity period shall

be reckoned to end as the date of pretermination for purposes of classifying the

transaction as short, medium or long term and correct rate of tax shall be

applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same

tax herein provided on persons performing similar banking

activities.”