Whether the Interest on the Net Peso Differentials Which are Deposited in Blocked Accounts with the Central Bank (CB) are Subject to Withholding Tax upon Release to the Banks

February 26, 1991 BIR RULING NO. 036-91 24 000-00 036-91 Gentlemen : This refers to your letter dated September 20, 1990 requesting a ruling as to whether the interest on the net peso differentials which are deposited in blocked accounts with the Central Bank (CB) are subject to withholding tax upon release to the banks. cdta It is represented that blocked peso deposits of commercial banks with the CB represents peso differentials from renewal of swap contracts; that the deposit arises when a maturing swap contract is renewed and the CB buying rate at renewal date is higher than the original forward rate of said maturing swap contract so that CB has to pay more pesos for the same amount of dollars being sold anew to CB by the commercial bank; that the additional pesos/net peso differentials which are evidenced by Credit Advices are not released to the bank but are instead credited in blocked accounts with CB; and that the net peso differentials are evidenced merely by Credit Advices and the interest thereon were not subjected to withholding tax at the time they were credited to blocked accounts since the Credit Advices are not debt instruments specified under Revenue Regulations No. 17-84. In reply thereto, I have the honor to inform you that interest on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements received by domestic corporations shall be subject to a 20% final withholding tax pursuant to Section 24(e) in relation to Section 50(a) both of the Tax Code, as amended. Moreover, pursuant to Section 2(h) of Revenue Regulations No. 17-84 in the case of banks and non-bank financial intermediaries, deposit substitutes shall mean all alternative forms of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, promissory notes, repurchase agreements, certificates of assignment or participation, and similar instruments with or without recourse as may be authorized by the Central Bank of the Philippines. Accordingly, since the interest on the net peso differentials which are credited in blocked accounts with the Central Bank are not in the nature of interest on bank deposits, yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangement, said interest are not subject to the 20% final withholding tax under Section 24(e) in relation to Section 50(a) both of the Tax Code, as amended upon its release to the banks. However, this ruling is without prejudice to the imposition of the 35% corporate income tax as well as to the 5% gross receipts tax under Section 24(a) and 119 both of the Tax Code, on the net peso differentials which are credited in block accounts with the Central Bank as well as the interest thereon. Very truly yours, (SGD.) JOSE U. ONG Commissioner