10% Final Withholding Tax on Foreign Loan

February 7, 1990 BIR RULING NO. 024-90 24 000-00 024-90 Gentlemen : This refers to your letter dated December 8, 1989 stating that a foreign bank does business in the Philippines through either an offshore banking unit (OBU) or a branch duly licensed to engage in commercial banking and authorized to operate under the expanded foreign currency deposit system (FCDU); that its HongKong branch granted foreign currency loans to certain borrowers who are residents of the Philippines; that the loans are in the form of Trade Credits referred to in the Philippine Revolving Short Term Trade Facility Agreement dated May 20, 1985 as amended (Trade Facility Agreement) and subject to the terms and conditions thereof; that the OBU or local branch helped in the negotiation of the loans; that in line with the foreign bank's policy of enhancing its global capital adequacy ratio, its HongKong branch now intends to sell the loans granted to Philippine borrowers to non-resident buyers or investors (participants) on a without recourse basis; that the sale of the loans will be done through silent participation which means that the Philippine debtors will not be notified or will not have knowledge of the sale of the participation; that as a party to the Trade Facility Agreement, the foreign bank remains bound by the obligations which are owing from a lender in respect of the loans; that the effects of the sale of the foreign loans through participation or sub-participation are as follows: (1) the loans will be eliminated from the books of the HongKong branch; (2) the participant does not have privity of contract with the borrower, therefore, it does not have a direct recourse against the borrower. Should the borrower default or become insolvent, all his actions must be initiated through the foreign bank which is the lender of record. After entering into a participation agreement, the HongKong branch does not carry the credit risk of the borrower anymore. If the HongKong branch becomes insolvent or bankrupt, even though the borrower would be able to repay its debts, the repayment will have to form part of the assets of the HongKong branch; (3) the HongKong branch continues to be the record holder of the credit being the one which has privity of contract with the borrower. The HongKong branch continues to have all the right of a creditor under the original loan agreement entered into with the borrower. However, the HongKong branch, in effect, acts as the agent of the buyer/investor and is obliged to transmit to the latter any amount received from the debtor; and that upon repayment by the Philippine borrower of the loans, the bank is then bound pursuant to the Trade HongKong Branch Facility Agreement to redeposit with the Philippine Central Bank an amount equal to the principal of the loans. In connection therewith, you now request confirmation of your opinion to the effect that the foreign loan subject of participation agreement remains onshore in nature and the interest thereon continues to be subject to the 10% final withholding tax. In reply thereto, I have the honor to inform you that your opinion is hereby confirmed. The gross onshore income which means the gross interest income arising from the aforementioned foreign currency loan subject to participation remains subject to the 10% final withholding tax pursuant to Section 24(e)(3) of the Tax Code as implemented by Revenue Regulations No. 10-76 as amended by Revenue Regulations No. 14-77. Very truly yours, (SGD.) JOSE U. ONG Commissioner