BIR Ruling

March 3, 1967 The Honorable Salih Ututalum Congressman Lone District, Sulu House of Representatives Manila S i r : This refers to your letter dated July 26, 1965 requesting information on the following queries: "1. A, a Filipino citizen, obtained a loan from B, a non-resident alien, in the amount of P80,000. Said loan earns an interest of P3,000 a year, A has not paid B yet the yearly interest of P3,000 for three years now. "2. B has no other source of income in the Philippines except the interest earned on the loan granted to A. "If A is to remit to B the accrued interest on the loan in lump sum, what is the amount to be remitted? "If it is to be paid in 3 installments, how much will each installment be? "If A has to pay B the principal, how much is he supposed to pay? "Will the standard deduction be the same if interest is to be paid by installment or by paying it in lump sum? "Can A make the payment to the BIR in behalf of B in the event that the P3,000 yearly interest on the loan is subject to tax? "Is the P3,000 interest deductible from the income tax return of A? If so, what percentage? "How much is the allowable deductions?" In reply thereto, I have the honor to inform you that no tax is assessable on money borrowed from a non-resident alien not engaged in trade or business in the Philippines. However, the interest paid thereon is subject to income tax and the borrower before remitting the yearly interest of P3,000 to the lender is required under Section 53 (b) of the National Internal Revenue Code to withhold a tax equal to 20% thereof. As regards the three year accrued interest in the total amount of P9,000, the borrower in the Philippines should remit to the lender abroad only the amount of P7,200 after deducting and withholding from the accrued interest of P9,000 the corresponding 20% withholding tax on every P3,000 yearly interest. If the loan is received in foreign check or other bills of exchange the same is subject to documentary stamp tax at the rate of P0.06 for each P200.00 or fractional part thereof pursuant to Section 218 of the same Code. The optional standard deductions under Section 30(k) is always based on the gross income of the taxpayer, hence your query in so far as A is concerned is answered in the affirmative. In the case of B, however, his yearly interest income in the amount of P3,000 is a fixed and determinable income subject to the withholding tax of 20% prescribed by Section 53 (b) of the Tax Code. The tax of 20% is fixed, hence B is not entitled to any deduction. Moreover, being a non-resident alien, B cannot elect or avail of the optional standard deduction under Section 30 (k) of the Tax Code. In this connection, returns to be filed by the withholding agent under the provisions of Sections 53 and 54 of the Tax Code cover the calendar year period, and under Republic Act No. 2343, the tax must be paid at the same time as the filing of the return. Consequently, for the failure of A to remit to the government within the time prescribed by law, the corresponding tax withheld from the yearly interest of P3,000, A is subject to the 5% surcharge and 1% monthly interest upon the amount required to be paid from the time the same became due until paid. cdpr The 3,000 yearly interest, is deductible in the computation of the income tax liability of A, pursuant to Section 30(b)(1) of the same Code. Accordingly, A may deduct from his gross income the full amount of P9,000 as interest expense paid by him within the taxable year. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue