Exemption from Withholding Tax on Interest Income from Bank Deposits of Local Governments or Political Subdivisions with PNB

April 23, 1984 BIR RULING NO. 069-84 53 (d) (1)-30-83-069-84 Gentlemen : This refers to your letter dated April 26, 1983 requesting that the interest income from the bank deposits of local governments or political subdivision such as those of provincial, municipal and city governments maintained with the Philippine National Bank (PNB) be exempt from the withholding tax. In reply, please be informed that Presidential Decree No. 1177, effective July 30, 1977 requires all government-owned or controlled corporations to pay income taxes, customs duties and other taxes and fees as are imposed under revenue laws. (See Opinion No. 133, S. 1977, Secretary of Justice) Accordingly, since provincial, city and municipal governments are liable to income tax, the interest on their bank deposits shall be subject to the 15% withholding tax in case of savings deposits and 20% in case of time deposits and yield from deposit substitutes, in accordance with Section 24(cc) in relation to Section 53(d)(1) both of the Tax Code, as amended by Presidential Decree No. 1739 and Batas Pambansa Blg. 135. However, since provincial, city and municipal governments are considered government units, they are entitled to either a tax subsidy or payments constituting equity contributions in which case, they shall not be required to pay cash or its equivalent. The revenue collecting agencies shall instead issue a "Payment Compliance Certificate" indicating the nature of the assessment and amount due. The subsidy shall be effected through journal vouchers or their equivalent. (See Joint Budget Circular No. 289 and pars. 4, 6 and 9, Finance Circular No. 2-78, implementing Section 23, Presidential Decree No. 1177) This serves as authority of the Philippine National Bank to forego withholding of the 15% tax on interests of savings deposit and 20% tax in case of time deposits and yield from deposit substitutes maintained by provincial, city and municipal governments with it. adc Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner