The Proper Way in Computing the Ten Percent (10%) Withholding Tax is to Use the Amount of the Interest Income as the Tax Base on Which the Ten Percent (10%) Withholding Tax is to be Applied

April 2, 1996 BIR RULING NO. 046-96 28 (a) 000-00 046-96 Castro Tan & Carag Law Offices Suite 6 B Eisenhower Condominium No. 7 Eisenhower St., Greenhills San Juan, Metro Manila Attention: Atty . Othelo C . Carag Gentlemen : This refers to your letter dated January 18, 1996 stating that your clients, East Asia Power Corporation and Duracom Mobile Power Corporation obtained foreign currency denominated loans from the Philippine National Bank (PNB); that under the Loan and Credit Agreements, it was agreed that the ten percent (10%) withholding tax imposed on interest income derived by the lender bank from foreign currency denominated loans shall be for the account of the borrowers; that in computing the ten percent (10%) withholding tax due PNB was using the following formula in determining the tax base on which the withholding tax rate of ten percent (10%) is applied: cdta Interest Rate N Principal x x 90% 365 days that to illustrate, if the principal loan is $100,000,000 and the stipulated interest rate is 8.625% (91 days labor rate of 5.875% plus 2.75% spread), the tax base used is $2,389,261.10 , and tax withheld is $238,926.11 , computed as follows: Accrued Interest : From December 1, 1995 to March 1, 1996 (91 days) 8.625% 91 $100,000,000 x 90% x 365 91 $100,000,000 x 9.58330% x = $2,389,261.10 365 Breakdown: Interest = $2,150,334.99 Withholding Tax ($2,389,261.10 x 10%) = $238,526.11 that you are of the opinion that the amount of interest income should be the tax base used in computing the withholding tax; that the correct formula in determining the tax base on which the withholding tax rate of ten percent (10%) is applied should be: Principal x Interest Rate x N 365 days that applying the foregoing figures, the tax base should be $2,150,342.46 and the withholding tax is $215,034.25, computed as follows: Accrued Interest: From December 1, 1995 to March 1, 1996 (91 days) 91 $100,000,000 x 8.625% x = $2,150,342.46 365 Withholding Tax: $2,150,342.46 x 10% = $215,034.25 that since the interest income of PNB is only $2,150,334.46, the withholding tax, to be shifted to your clients, should be $215,034.25, representing ten percent (10%) of said interest income in accordance with Section 24(e)(3) of the Tax Code, as amended. In connection therewith, you are requesting confirmation of your opinion that the formula used by PNB in computing the withholding tax is without legal basis; and that the proper way in computing the ten percent (10%) withholding tax is to use the amount of the interest income as the tax base on which the ten percent (10%) withholding tax is to be applied. cdtech In reply thereto, please be informed that your opinion is hereby confirmed. The tax base upon which the appropriate withholding tax rate shall be applied is the total amount of the interest income to be paid without grossing up thereto the corresponding withholding tax due thereon, whether the borrower assumes to pay the tax or not. Thus, in your illustration, if the interest income of PNB is $2,150,334.46, the same shall be the tax base upon which the withholding tax of ten percent (10%) shall be imposed. [BIR Ruling dated January 27, 1978]. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue