BIR Ruling

June 30, 1976 Securities Marketing Department Central Bank of the Philippines Manila Attention: Mr . Vicente I . Ilustre Director Gentlemen : This refers to your letter dated May 17, 1976 requesting a ruling on the following queries, viz: "1. Does a TAXABLE government security, the collectible income tax of which is assumed by the issuing institution , carry the same tax implication as that of a TAX-EXEMPT government security? Stated otherwise, does CB's prepayment of the income tax due on CBCIs (which is a taxable security) give CBCI the tax treatment applicable to tax-exempt government security, and for this reason, CBCI corporate investors may not deduct INTEREST EXPENSE (representing cost of money used to purchase CBCIs) from gross income? Does the provision of Sec. 78, Revenue Regulation No. 2. In this instance, apply to CBCI by virtue of CB's assumption of the income tax? "2. Parallel to this, if INTEREST EXPENSE incurred to purchase CBCIs may not be allowed as a deduction from gross income, under what principle or specific provision of the Tax Code may such disallowance be made?" In reply thereto, I have the honor to inform you that Section 78 of Revenue Regulations No. 2 amplifying Section 30(b)(1) of the Tax Code and providing that "interest on indebtedness incurred or continued to purchase bonds and other securities, the interest upon which is exempt from tax, is not deductible" does not apply to interest expense representing cost of money used to purchase Central Bank Certificates of Indebtedness (CBCI) which are not tax-exempt government securities. Central Bank Certificates of Indebtedness are not among those government bonds and securities enjoying exemption from taxation; for although the purchasers thereof are not made to pay income tax on interest earned by them from said certificates, said interests are not actually tax-free, as the Central Bank assumes payment of the income tax due thereon. (BIR Ruling dated March 11, 1976) In view thereof, this Office is of the opinion as it hereby holds that interests paid by corporate investors particularly Banking institutions on account of deposits determined to have been used in the purchase of such Central Bank Certificates of Indebtedness are deductible from gross income under Section 30(b)(1) of the Tax Code. Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3