BIR Ruling No. 051-10

September 7, 2010 BIR RULING NO. 051-10 Bankers Association of the Philippines 11th Floor, Sagittarius Condominium Bldg. H.V. Dela Costa Street, Salcedo Village Makati City Attention: Aurelio R. Montinola III President Gentlemen : This refers to your letter dated May 25, 2010 requesting a clarification of BIR Ruling No. DA (FIT-002)054-2010 dated April 28, 2010 insofar as it confirmed that the interest income to be derived by the foreign currency deposit units (FCDUs) from the 3-year and 5-year Multi-Currency Retail Treasury Bonds for Overseas Filipino Workers (rTBs) issued by the Bureau of Treasury last April 29, 2010 is subject to the 5% gross receipts tax, aside from the 10% final withholding tax. It is your position that the above ruling is contrary to the provisions of Republic Act (RA) No. 9294 which restored the exemption of FCDUs from all taxes on its foreign currency transactions except for the 10% final withholding tax. In reply, please be informed that after a careful re-study of the said ruling in light of your arguments, this Office has decided to reconsider the same. In resolving the issue of whether the interest income derived by FCDUs from the rTBs is subject to the 5% gross receipts tax in addition to the 10% final withholding tax as held in the questioned ruling, this Office finds it necessary to look at the historical background of the taxation of FCDUs. Prior to the amendments introduced in the National Internal Revenue Code of 1997 (NIRC), Section 25 (a) (6) (B) of the 1977 Tax Code states that: aDcTHE "(B) Income derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with non-residents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Central Bank of the Philippines to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be subject to the usual income tax payable by banks: Provided, 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 10% tax." Implementing the above provision is Section 3 of Revenue Regulations (RR) 10-76, as amended by RR 14-77, which pertinently provides thus: "Sec. 3. Rates of Income Tax to be Imposed. The rates of income tax to be imposed, which shall be in lieu of all other taxes such as, but not limited to privilege tax, gross receipts tax, documentary and science stamp tax and profit remittance tax. Clearly, under the 1977 Tax Code, as implemented by RR 10-76, FCDUs were exempt from paying all other taxes including gross receipts tax. With the introduction of Section 28 (A) (7) (b) of the NIRC of 1997, amending Section 25 (a) (6) (B) of the 1977 Tax Code, however, the phrase "exempt from all taxes" was deleted. Said Section 28 (A) (7) (b) reads: "SEC. 28. Rate of Income Tax on Foreign Corporations. (A) Tax on Resident Corporations xxx xxx xxx (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (b) Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income. Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax." By the clear import of the law, FCDUs no longer enjoyed the exemption under the 1977 Tax Code. It has been the position of this Office that the deletion of the phrase "exempt from all taxes" by the legislators indicated that the legislative intended to change the meaning of the statute. By virtue of such deletion, therefore, RR No. 10-76, which implemented the old law was no longer applicable and FCDUs became liable to pay gross receipts tax on its interest income from foreign currency loans. Subsequently, RA No. 9294 otherwise known as "An Act Restoring the Tax Exemption of Offshore Banking Units (OBUs) and Foreign Currency Deposit Units (FCDUs)" further amended Section 28 (A) (7) (b) of the NIRC of 1997, as follows: EAcIST "SEC. 28. Rate of Income Tax on Foreign Corporations. (A) Tax on Resident Corporations xxx xxx xxx (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. xxx xxx xxx (b) Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with non-residents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks: Provided, however, That interest income from foreign currency loans granted by such depositors 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%)." (emphasis supplied) With the foregoing amendment, the tax exemption enjoyed by FCDUs under the 1977 Tax Code was clearly restored. The restoration of the exemption includes exemption from the gross receipts tax. It is significant to note that the present provision under the NIRC uses the phrase "exempt from all taxes" as originally provided in Section 25 (a) (6) (B) of the 1977 Tax Code. Consequently, the principle of legislative approval of administrative interpretation by reenactment obtains in the instant case. This principle means that "the reenactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of a prior executive construction." (Commissioner of Internal Revenue versus American Express International Inc., G.R. 152609, June 29, 2005) Applying this principle, the legislature is presumed to have reenacted the law with full knowledge of the contents of the revenue regulations then in force regarding the FCDUs, and to have approved or confirmed them because they would carry out the legislative purpose. The particular provisions of the RR 10-76 exempting FCDUs from gross receipts tax, among other taxes, are, therefore, re-enforced. In view of the foregoing, this Office hereby confirms your position that the interest income to be derived by FCDUs from the rTBS issued by the Bureau of Treasury last April 29, 2010 is exempt from the 5% gross receipts tax. Accordingly, BIR Ruling No. DA (FIT-002) 054-2010 dated April 28, 2010 is hereby modified insofar as it is inconsistent with this ruling. IEaCDH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue