Inter-company advances not subject to tax on imputed interest income, but subject to DST

September 26th, 2011 | In news |

The Supreme Court recently held that intercompany loans or advances are not subject to tax on the “theoretical interest income” received by the lending company but such loans or advances are subject to documentary stamp tax.

Section 43 of the 1993 NIRC provides that, “(i)n any case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.” According to the Supreme Court, however, this does not include the power to impute “theoretical interests” on the advances given by a company to an affiliate, which would make the lender-company liable for income tax. Section 28 of the 1993 NIRC provides that the term “gross income” is understood to mean all income from whatever source derived, including, but not limited to the following items: compensation for services, including fees, commissions, and similar items; gross income derived from business; gains derived from dealings in property;” interest; rents; royalties;  dividends; annuities; prizes and winnings; pensions; and partner’s distributive share of the gross income of general professional partnership. While it has been held that the phrase “from whatever source derived” indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, the term “income” has been variously interpreted to mean “cash received or its equivalent”, “the amount of money coming to a person within a specific time” or “something distinct from principal or capital.” Thus, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the BIR.

The Supreme Court ruled, however, that the intercompany loans, which were evidenced by instructional letters and journal and cash vouchers, qualified as loan agreements upon which documentary stamp taxes may be imposed. The Tax Code provisions on DST (Section 180 of the 1997 NIRC and Section 173 of the 1993 NIRC) are applicable to “(a)ll loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located or used in the Philippines.”  Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No. 9-94 provide as follows:

Section 3. Definition of Terms. – For purposes of these Regulations, the following term shall mean:

(b) ‘Loan agreement’ – refers to a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid.  The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings.

(CIR v. Filinvest Development Corporation, G.R. No. 163653, 19 July 2011; To read the decision in its entirety, go to