10% Final Withholding Tax

July 6, 1979 BIR RULING NO. 056-79 10% final withholding tax This refers to your letter dated December 20, 1977 requesting confirmation that the interest income of your client, Banque Nationale de Paris, derived from foreign currency loan transactions within the Philippines is exempt from Philippine income tax and from the 10% final withholding tax imposed by Presidential Decree No. 1034 (now found in Section 24 (f)(1) of the Tax Code of 1977). It appears that your client is a foreign banking institution actually owned and controlled by the Government of France, that it is one of those foreign banks which is authorized by the Central Bank of the Philippines to transact offshore banking business in accordance with the provisions of Presidential Decree No. 1034 as implemented by Central Bank Circular No. 546; that pursuant to said authorization, it extends foreign currency loans to Philippine residents; and that it generates interest income on such loans to Philippine resident, which income is considered as gross onshore income subject to 10% final withholding tax. You argue that on the basis of Section 29 (b)(8)(A) of the Tax Code which reads: "SEC. 29. Gross income "xxx xxx xxx "(b) Exclusions from gross income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: "xxx xxx xxx "(8) Miscellaneous items . (A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional financing institutions established by governments." and other previous rulings of this Office, your client which is 92%-owned and controlled by the Government of France and is also enjoying refinancing from the French government is tax-exempt on the interest income it earns from Philippine residents. In effect, you are making a distinction between a private foreign bank and a government owned or controlled foreign bank, contending that privately-owned foreign commercial banks are subject to the 10% final withholding tax and that those which are owned or controlled by foreign government are exempt from said tax. In reply, please be informed that Presidential Decree No. 1034 which prescribes two taxes, namely: (1) 5% tax on the net income of offshore banking units derived from transactions with non-residents and other offshore banking units, which tax shall be in lieu of all taxes on that said transactions and (2) 10% withholding tax as final tax on gross interest income derived from loans to Philippine residents, does not distinguish between a private foreign banks and to exempt government-owned and controlled foreign banks from said tax. Furthermore, the above-quoted provision of the Tax Code cannot be invoked relative to this claim for exemption. A reading of the above-quoted provision would reveal that it includes only the income derived from passive investments made in the Philippines by foreign governments, financing institutions owned, controlled, or enjoying refinancing from said foreign governments and international or regional financing institutions established by governments. Said institutions do not have branches, subsidiaries or affiliates in the Philippines. The provision, therefore, does not encompass income received by said institutions which income is derived from business activities conducted through their branches, subsidiaries or affiliates in the Philippines. Moreover, before P.D. No. 69 which took effect on January 1, 1973, the exemption from income tax under the above-quoted provision of the Tax Code, was limited to the income from passive investments of foreign governments. After P.D. No. 69, the coverage of the exemption was enlarged to include the income not only of foreign governments but also financing institutions owned, controlled or enjoying refinancing from foreign government and international or regional financing institutions established by governments. The scope of the exemption was also enlarged to include the income derived from loans. It is obvious that our government wanted to attract more foreign investors and financiers. In other words, enlarging the scope of the exemption in question is one of the measures "to make the Tax system more responsive to the requirements of a developing economy, foremost of which is the speedy restructuring of the social, economic and political institutions of the country". (See Whereas Clauses of P.D. No. 69) Such being the case, the granting of tax exemption in favor of foreign financing institutions owned or controlled by foreign governments is but a concession granted by our government to said institutions for having granted loans or made investments which are needed to develop our economy. Viewed in this light, it can be said also that the granting of loans of a foreign financing institutions owned or controlled by foreign governments which is within the scope of the tax exemption could not have been a part of the regular business of said foreign institutions conducted for profit. In the case of an offshore banking unit, such as your client, it means "a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines". (Section 1.b., P.D. No. 1034, See also Sec. 2.b., Revenue Regulations No. 1076 implementing P.D. No. 1034 and 1035). Accordingly, the income of an offshore banking unit having been derived from regular, non-concessionary banking business in the Philippines, does not fall within the purview of the above-quoted provision of Section 29 (b)(8)(A) of the Tax Code of 1977. In the same vein, exemption from tax is a special privilege which, in order to be valid, should be unequivocable and unmistakably expressed in clear and convincing language. The exemption you ask for your client is unfortunately, not expressedly or tacitly found in any provision of law. In view thereof, this office holds that your client, Banque Nationale de Paris is subject to the 10% final withholding tax under Presidential Decree No. 1034 (now found in Section 24 (f) (1) of the Tax Code on its interest income from loans to Philippine residents. cd