Taxpayer Not Obliged to Withhold the 15% Tax Due on Interest to Be Paid to Market Placers After 2 Years

May 29, 1985 BIR RULING NO. 081-85 24-cc 000-00 081-85 Gentlemen : This refers to your letter dated January 5, 1985 stating that your client, PARAMOUNT FINANCE CORPORATION (Paramount for short) suffered from a rush of pretermination of placement due to public panic; that since it is impossible for Paramount to pay preterminated placements all at the same time, its officials convinced some of the money market placers to roll over for a shorter term their placements but on the condition that the principal will fall due ahead of the interest by two years which means that at the time of the maturity and payment of the principal, a separate promissory note will be issued for the interest to be due and payable in two years; and that because the interest is not yet due and payable, Paramount did not accrue said interest in its books. cdt Based on the foregoing facts, you now request information if your client can deduct said interest currently as an expense and pay the corresponding withholding tax due thereon despite the fact that by express agreement of the parties, i.e. the debtor and creditor, said interest does not become due and payable till after two years and despite non-accrual thereof in the books. In reply, I have the honor to inform you that your query is answered in the negative. Section 7(b) of Revenue Regulations No. 17-84 implementing P.D. No. 1959 amending Section 24(cc) of the Tax Code, provides that "only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes of imposing the withholding taxes in accordance with these regulations shall be allowed as interest expense deductible for purposes of computing the taxable net income of the payor". In the instant case, since the interest will not be paid to the market placers until after the lapse of two (2) years, your client is not under obligation to withhold the 15% tax due thereon. Consequently, there being no payment as yet, your client cannot currently claim the said interest as deduction in its income tax return. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner