Question & AnswerQ&A (PRESIDENTIAL DECREE NO. 1738)
The main purpose of Presidential Decree No. 1738 is to declare the banking industry as indispensable to the growth of the national economy and to provide certain fiscal incentives related to taxation on gains realized from transactions involving banks, non-bank financial intermediaries, and finance companies to encourage increased capitalization in these institutions.
Gains realized from merger or consolidation exchanges of property solely for stock in another bank or financial intermediary, gains from the disposition of property invested in new issues of capital stock of banks or financial intermediaries, and gains realized from exchange of property for new issues of capital stock in banks or similar corporations are exempted from tax for five years under certain conditions.
The shares of stocks must not be disposed of, transferred, assigned, or conveyed within five (5) years from the date of issue, except in cases of transmission on account of death, to maintain the tax exemption.
If the shares are disposed of before the five-year period (except in cases of death), all taxes due, including interest on the gains realized from the original transfer, sale, or disposition of the assets, shall immediately become due and payable.
Such officials shall be punished by a fine of not less than Five Thousand pesos and imprisonment of not less than two years.
A bank is defined according to Section 2 of the General Banking Act, Republic Act No. 337, as amended and includes commercial banks, thrift banks, rural banks, or specialized government banks.
It refers to a financial intermediary authorized by the Central Bank of the Philippines to perform quasi-banking functions as defined in Section 2-D(c) of the General Banking Act, Republic Act No. 337, as amended.
Quasi-banking functions include borrowing funds for the borrower's own account through issuance, endorsement or acceptance of various debt instruments from twenty or more lenders for purposes of relending or purchasing receivables; however, non-financial companies borrowing funds for limited purposes are excluded.
It refers to corporations or partnerships other than banks or insurance companies primarily organized to extend credit facilities to consumers and enterprises through loans, discounting or factoring commercial papers, buying and selling contracts, leases, mortgages, and other evidences of indebtedness.
The Ministry of Finance, upon the recommendation of the Bureau of Internal Revenue and in consultation with the Central Bank of the Philippines, is responsible for promulgating the implementing rules and regulations.
Any transfer of stock ownership contrary to the decree must be supported by evidence of tax payment inclusive of interest, and failure to comply leads to penalties including fines and imprisonment as specified.
Such corporations must be registered and authorized by the Central Bank of the Philippines to be recognized under the decree.
Shares of capital stock issued under this decree must be stamped with the phrase 'EXEMPT UNDER PRESIDENTIAL DECREE NO.' indicating that they are tax-exempt shares under the specified decree and subject to holding period restrictions.