BIR Ruling

December 16, 1968 The Officer-in-Charge Office of Legal Affairs Department of Foreign Affairs Padre Faura, Manila S i r : This is in reply to the Note Verbale No. 2459 dated September 11, 1968 of the Royal Netherlands Embassy, requesting information on a query stated as follows: "Is a non-resident tax due in the Philippines on interest to be paid on foreign credits? "Are Filipino debtors allowed to withhold such tax from any payments to the foreign firm or individual?" Section 53 of the National Internal Revenue Code as amended by Republic Act No. 5431 reads as follows: "Sec. 53. Withholding of tax at source . (a) Tax-free covenant bonds. (1) Requirements of withholding. In any case where bonds, mortgages, deeds of trust, or other similar obligations of domestic or resident foreign corporations, contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed in this title upon the obligee or to reimburse the obligee for any portion of the tax or to pay interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or of any state or country, the obligor shall deduct and withhold a tax equal to twenty-five (25) percent of the interest or other payments upon those bonds, mortgages, deeds of trust, or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed and the interest or other payment thereon paid, within or outside the Philippines, if the interest or other payment is payable to a non-resident alien or to a citizen or resident of the Philippines . (b) Non-resident aliens and foreign corporations (1) Non-resident aliens Every individual, corporation, partnership, or association, in whatever capacity acting, including a lessee or mortgagor of real or personal property, trustee acting in any trust capacity, executor, administrator, receiver, conservator, fiduciary, employer, and every officer or employee of the Government of the Republic of the Philippines having the control, receipt, custody, disposal, or payment of interest, dividends, rents royalties, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable annual, periodical or casual gains, profits, and income, and capital gains, of any non-resident alien not engaged in trade or business within the Philippines, shall (except in the cases provided in subsection (a)(1)of this section) deduct and withhold from the annual, periodical, or casual gains, profits, and income and capital gains, a tax equal to twenty-five (25) percent thereof. This deduction and withholding shall not be required in the case of dividends paid by a foreign corporation unless (1) the corporation is engaged in trade or business within the Philippines, and (2) more than eighty-five (85) percent of the gross income of the corporation for the three-year period ending with the close of its taxable year preceding the declaration of the dividends (or for such part of the period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provision of Section 37. The Commissioner of Internal Revenue may authorize the tax to be deducted and withheld from the interest or other income upon any security or obligation the owners of which are not known to the withholding agent. (Emphasis supplied) (2) Non-resident foreign corporations In the case of foreign corporation subject to tax under this title not engaged in trade or business within the Philippines, there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in sub-section (b)(1) of this section, as well as on remunerations for technical services or otherwise, a tax equal to thirty-five (35) percent thereof . This tax shall be returned and paid in the same manner and subject to the same conditions as provided in Section 54. This deduction and withholding shall not be required in the case of re-insurance premiums ceded to foreign corporations not engaged in trade or business in the Philippines." (Emphasis supplied) Pursuant to the aforequoted provision of law, interests paid on foreign loans or credits are subject to withholding tax at source equal to thirty-five (35) percent of the amount thereof, if such interest are payable to a foreign corporation not engaged in trade or business in the Philippines and not having any office or place of business therein, and to twenty-five (25) percent of the amount of such interests, if the same are payable to a non-resident alien individual not engaged in trade or business in the Philippines and not having any place of business therein. Furthermore, Filipino debtors are, by specific provision of Section 53(a)(1) of the Tax Code, authorized to deduct and withhold from any payments to be made or remitted to any non-resident alien individual not engaged in trade or business in the Philippines and not having any place of business therein, a tax equal to twenty-five (25) percent of the amount thereof, provided that if the credit is made payable to a foreign corporation not engaged in trade or business in the Philippines or not having any place of business therein, the amount of the tax to be deducted and withheld shall be thirty-five (35) percent of the amount thereof. cdta Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue