BIR Ruling [DA-456-99]

August 04, 1999 BIR RULING [DA-456-99] Bankers Association of the Philippines 11th Floor, Sagittarius Condominium Bldg. H. de la Costa St., Salcedo Village Makati City Attention: Mr . Miguel C . Andaya Vice Chairman Gentlemen : This refers to your letter dated October 8, 1998 relative to your reaction and comments on Revenue Regulations No. 10-98 and BSP Circular No. 177-98 with the following questions and suggestions, viz: cdll A. On Revenue Regulations No . 10-98 1. On Section 2.24(A)(2) thereof That foreign currency deposit joint account under the names of a non-resident and a resident spouse/relative should be fully tax exempt. 2. On Secs. 2.24(B), 2.27, 2.27(B) and 2.58 thereof You are proposing (i) further extension of the October deadline by another three months; and (ii) waiver of the prescribed documentary requirements especially for matured and completed transactions with your ex-clients during the first nine (9) months of 1998. 3. On Secs. 2.27 and 2.28(C) thereof You have posed the following queries: (i) Will the income of the FCDU/OBU from foreign currency transactions with residents be subject to Gross Receipts Tax as well as Documentary Science Tax? In the case of foreign banks' FCDU, will such income be subject to Profit Remittance Tax? llcd (ii) How will income be computed for transactions relating to foreign exchange transactions and how will the "person making income payments" be determined? 4. On Sec. 2.58 thereof That you wish to defer the requirement on the quarterly submission of lists of individual and corporate depositors who are tax exempt and the requirement that depositors should execute a written permission allowing the bank to divulge their identity to the Bureau and that refusal to do so will mean loss of tax exempt status until adequate assurance can be given to the banks that they will not be facing any legal risk by complying with the revenue regulations. B. On BSP Circular No . 177-98 That you wish to confirm that the manner of payment of interest, whether in advance, periodically or at maturity, will in no way affect the tax exempt status of said instrument. In reply, please be informed as follows: A. On Revenue Regulations No . 10-98 1. On Sec . 2 . 24(A)(2) Although, as you have stated, the law does not provide for partial tax exemption and that, as you have alleged, "splitting" of tax exemption is arbitrary and extremely difficult to comply with, we cannot just agree with you that we should fully exempt from the final withholding tax requirements the interest income derived from foreign currency bank deposit accounts jointly made in the name of a non-resident citizen (e.g., an overseas contract worker or a Filipino seaman ) and a resident spouse or dependent because the law specifically excepted only a " non-resident individual ." ( Expressio unius est exclusio alterius .) LibLex 2. On Secs . 2 . 24(B) , 2 . 27 and 2 . 27(B) and 2 . 58 on your request for extension of the October 25 deadline by another three months, we regret to tell you that we cannot grant your request because we have in fact given the banks engaged in the foreign currency deposit and offshore banking system enough extension time to file the tax returns for the first three taxable quarters of 1998 and pay the corresponding taxes due thereon without incurring any penalty, provided that the said taxes are duly paid not later than October 25, 1998. Similarly, we are sorry that we cannot likewise grant your request for waiver of the documentary requirements of proof of non-residency of the depositor especially for matured and completed transactions with your ex-clients during the first nine (9) months of 1998 because of the principle that tax exemptions are always construed in strictissimi juris and it is incumbent upon the taxpayer to prove that he is indeed entitled to such tax exemption by providing the evidentiary requirements as provided for under Secs. 2.24(B) and 2.27(B) of Rev. Regs. No. 10-98, which a non-resident citizen or non-resident alien or a non-resident foreign corporation can easily provide, if required. Besides, we believe that subject banks, gently suspicious as they always are with their clients, could have expectantly required the subject documentary requirements in anticipation of what the regulations on the matter will provide. If at all, we can accept whatever best evidence required by the banks as proof of non-residency of their clients but only within the period requested. llcd 3. On Secs . 2 . 27 and 2 . 28(C) (i) Yes, the interest income derived by domestic depository banks and OBUs under the expanded foreign currency deposit system which is included in the gross receipts of the bank (except interest income from long-term deposits with maturity period of over seven (7) years shall be subject to gross receipts tax because the term " bank " under R.A. No. 337, as amended, otherwise known as " The General Banking Act ," includes branches and agencies in the Philippines of foreign banks . Thus, earnings under the expanded foreign currency deposit system by the subject banks forming part of their gross receipts shall be subject to the gross receipts tax. Said interest income, however, is not subject to documentary stamp tax because the Tax Code does not impose documentary stamp tax on income derived by a person. On the other hand, any profit derived by an OBU (which is a unit of a foreign bank authorized to engage in business in the Phils. under the expanded foreign currency deposit system) which is effectively connected with the conduct of its banking business in the Philippines remitted to its head office abroad shall be subject to a tax of 15% which shall be based on the total profits applied or earmarked for remittance without any deduction of the tax component thereof (except banking transactions of OBUs which are registered with the PEZA). (ii) On the matter of how income will be computed for transactions relating to foreign exchange and how the "persons making income payments" are to be determined, we will be very glad to further discuss this matter with the banking industry thru the BAP Tax Committee, as you suggested, and make the necessary amendment or modification, if any, of the existing regulations, if need be. However, we regret to say that we cannot defer the implementation of this particular provision pending the results of the aforesaid discussion with you because, so far, we believe that the existing laws and regulations on the matter are clear enough and unambiguous and have provided enough measures on how to compute the income from the said foreign currency transactions and how to determine the said income payors, which simply means, of course, to be those persons who pay the interest income. 4. On Sec . 2 . 58 re your request for deferment of the information requirement on non-resident tax exempt depositors, we believe that this provision is not really a violation of Sec. 2 of R.A. No. 1405, entitled "An Act Prohibiting Disclosure of or Inquiry into, Deposits with any Banking Institution and Providing Penalty Therefor", viz: "Sec. 2. All deposits of whatever nature with banks or banking institutions in the Philippines . . . are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, EXCEPT UPON WRITTEN PERMISSION OF THE DEPOSITOR , . . ." Sec. 2.58 of Rev. Regs. No. 10-98 provides that to avail of the exemption from the tax on interest income from foreign currency deposit, the depositor is required to execute a written permission allowing its depository bank to inform the Commissioner that as a non-resident, he is exempt from the tax and that the depositor who fails to comply with this requirement shall not be entitled to the exemption privilege. Again, we would like to reiterate the principle that tax exemptions are always construed in strictissimi juris and it is incumbent upon the taxpayer to prove that he is really entitled to such exemption. Please take note that the confidentiality of the bank deposits is not violated if there is a written permission from the depositor allowing the depository bank to inform the Commissioner that he is a non-resident, and as such, he is exempt from the subject tax . Besides, what the regulations merely require is a list of all non-resident persons and corporations who were given exemption from the tax on interest income on foreign currency deposits without necessarily examining, inquiring, looking into nor divulging the amount of their deposits and the corresponding interest income derived therefrom. B. On BSP Circular No . 177-98 , we have taken note of your confirmation that the manner of payment of interest of long-term non-negotiable tax exempt certificates of time deposits under Sec. 24(B)(1) of the Tax Code of 1997, whether said payment of interest is in advance, periodically, or at maturity, does not in any way affect the tax exempt status of said instrument. However, it is our opinion that in order that the said long-term non-negotiable tax-exempt certificates of time deposits can be exempt from income tax, Sec. 24(B)(1) of the Tax Code provides that the holding period for this investment portfolio shall be for a period of five (5) years. If it is pre-terminated before the lapse of the 5-year period the interest yield shall be subject to tax. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue