BIR Ruling No. 016-09

August 3, 2009 BIR RULING NO. 016-09 Philippine National Bank 7/F PNB Financial Center Pres. Diosdado Macapagal Boulevard Pasay City Attention: Ms. Ligaya R. Gagolinan Senior Vice President and Deputy CEO Gentlemen : This refers to your letter dated January 16, 2009 requesting for an opinion as to whether Philippine National Bank (PNB) can legally undertake the filing of the returns and remittance of the 10% Final Withholding Tax (FWT) on the onshore income of its Foreign Currency Deposit Unit (FCDU) from resident loan borrowers who may be large and/or non-large taxpayers. The following are the procedures to be followed on the proposed scheme: 1. Borrowers will execute authorization letters for PNB to file the returns and remit the corresponding FWT; 2. Borrowers will pay to PNB the gross interest income due, i.e., without deducting the 10% FWT; 3. PNB will remit in behalf of the borrowers the corresponding 10% FWT to the authorized agent banks located in the Revenue District Office (RDO) having jurisdiction over the borrowers on the prescribed due date; IAETDc 4. The borrowers will issue duly accomplished Certificate of Final Tax Withheld At Source (BIR Form No. 2306) as evidence of the withholding tax deducted from the income payments. and that in the 2nd Indorsement dated May 5, 2009 of the Withholding Tax Division, the said Office interposes no objection to the said procedure that PNB may undertake the filing of the withholding tax returns and remittance of the 10% final withholding tax on the income of its FCDU from resident loan borrowers provided that the name of the resident loan borrower shall appear as the payor/withholding agent in the remittance return and all withholding tax requirements are complied with. In reply thereto, please be informed that Section 27 (D) (3) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9294, otherwise known as An Act Restoring the Tax Exemption of Offshore Banking Units (OBUs) and Foreign Currency Deposit Units (FCDUs), pertinent portion of which reads: "SEC. 27. Rates of Income Tax on Domestic Corporations. "(D) Rates of Tax on Certain Passive Incomes. AaCEDS "(3) . . .: Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%) ." On the other hand, Revenue Regulations No. 10-98, as amended, provides that the person making the income payment shall withhold and remit the tax withheld pursuant to the provisions of Sections 57 and 58 of the Tax Code of 1997. Thus, in the case of interest payment by a resident of the Philippines on a foreign currency loan from an OBU or an FCDU, the withholding agent shall be the said resident. Prescinding from the above-cited regulations, the payor-borrower is the one constituted by law to withhold and remit the 10% final tax on onshore income but the obligation of paying the 10% final tax on onshore income rests on the one directly liable for it, i.e., PNB. However, in the case of ING BANK N.V. MANILA BRANCH vs. COMMISSIONER OF INTERNAL REVENUE, CTA Case No. 6187, August 9, 2004, it was held that "The law and the jurisprudence do not dispense the liability of the taxpayer with respect to the payment of 10% final tax on onshore income if the withholding agent fails to deduct and remit the same to the Bureau of Internal Revenue. After all, it is the taxpayer who earns the income. Truly, the obligation to pay the 10% onshore tax lies with petitioner because the onshore income was earned by it. . . ." ESCacI To reconcile the inconsistency and pending the resolution of this issue with the courts, and to ensure the remittance of the tax on time as prescribed in Revenue Memorandum Circular No. 14-2002, this Office holds that PNB may undertake the filing of the returns and remittance of the 10% FWT on the onshore income of its FCDU from resident loan borrowers for and in behalf of the payor/withholding agent to avoid the penalties that may be imposed for non-payment under the doctrine of self-withholding. It is to be emphasized, however, that this Office qualifies No. 4 of the proposed scheme by requiring that sufficient proof of the remittance to the AAB should be presented by PNB to the borrower before the latter issues BIR Form No. 2306. Moreover, a copy of such proof should be attached to the said Form. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue