Interest Income - Subject to 20% Final Tax

January 15, 1993 BIR RULING NO. 030-93 INTEREST INCOME SUBJECT TO 20% FINAL TAX 24 (e) 000-00 030-93 San Miguel Yamamura Asia Corporation SMPP Center, 109 Carlos Palanca, Jr. (formerly Alvarado St.) Legaspi Village Makati, Metro Manila Attention: Mr . Carlos S . de la Rosa Senior Assistant Vice-President and Finance Director This refers to your letter dated November 4, 1992 stating that San Miguel Yamamura Asia Corporation (SMY) is a joint venture formed by San Miguel Corporation and Yamamura Glass Co., Ltd. of Japan to engage in the manufacture of glass containers with plant located at Imus, Cavite; that it is registered with the BOI under Certificate of Registration No. PD 91-145 as a new domestic producer of glass containers on a preferred non-pioneer status, pursuant to Executive Order No. 226 otherwise known as the Omnibus Investment Code of 1987; that SMY's tax incentives include, among others, an income tax holiday for four (4) years starting June, 1992 or date of commercial operation, whichever comes first, but in no case earlier than the date of its registration; that in the course of its business operations, SMY derived interest income which arose from the following transactions: "1. Capital Contribution As a newly organized joint venture corporation, it imported or purchased machinery and equipment funded from capital contributions. In between the placing of the order and actual payment thereof the allotted funds for the importation or purchase of machinery and equipment were either lent out or invested in securities which generated interest income. "2. Operating Requirements With its machinery and equipment in place, SMY began commercial operations in June 1992. To ensure continuity of its operations, SMY regularly obtains financing, either through bank loans or suppliers credit, to meet its daily operating requirements, e.g.,the payment of direct material purchases, salaries and other administrative expenses. SMY programs its cash resources such that borrowed funds and payables to suppliers are eventually liquidated from sales collections. However, the timing and amount of the company's sales collections are never perfectly matched with its maturing obligations. Thus, collections received before the due dates of SMY's obligations and collections received in excess of current obligations are temporarily invested in short term securities with maturities timed to meet future obligations. These investments generate interest income." In connection therewith, you now request confirmation of your opinion that interest income earned under the aforementioned circumstances arises from the ordinary and normal course of your trade or business and is consequently exempt from income tax under Art. 39(a), E.O. No. 226. In reply thereto, I have the honor to inform you that your request for exemption from income tax of your aforementioned interest income is hereby denied for lack of legal basis. New registered non-pioneer firm engaged in a preferred area of investment is granted incentives among others, of an income tax holiday for four (4) years from commercial operation (Article 39(a)(1), Title III, Executive Order No. 226 otherwise known as the Omnibus Investments Code of 1987. The income tax holiday or exemption from income taxes levied by the National Government refers to income derived by the firm from its commercial operations. Thus, although SMY enjoys an income tax holiday for four (4) years from the date of its commercial operation pursuant to Article 39(a)(1), Title III of Executive Order No. 226, nevertheless its interest income from Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes are subject to a 20% final tax pursuant to Section 24(e) of the Tax Code, as amended, considering that its aforementioned interest income are derived from its passive investments, and not from its operations. cdtech JOSE U. ONG Commissioner of Internal Revenue