BIR Ruling No. 083-83

May 13, 1983 BIR RULING NO. 083-83 Gentlemen : This refers to your letter dated March 7, 1983 requesting opinion in behalf of your client, BACNOTAN CONSOLIDATED INDUSTRIES, INC., as to the proper tax treatment of income arising from a transaction described as follows: "Our client obtained a credit accommodation from Philippine Banking Corporation ("PBC") in the Peso equivalent of US$2 Million. PBC granted the credit accommodation by virtue of a pre-arranged US$2 Million FCDU deposit made by Banque de I'Indochine et de Suez ("BIS"), a bank organized under French laws and now owned and controlled by the French Government due to a recent French Government nationalization measure. BIS made the $2 Million deposit, evidenced by a Certificate of Deposit issued by PBC, pursuant to an agreement with PBC that the Peso equivalent of said deposit will be made available to our client. To protect PBC in case of default by our client, BIS assigned the Certificate of Deposit in favor of PBC as security for our client's credit accommodation with PBC. "Our client's credit accommodation with PBC is evidenced by a Promissory Note which has assigned , under a Deed of Assignment of Promissory Note, by PBC to BIS. This assignment was made effective by the bank endorsement of the Promissory Note by PBC and delivery of the same to BIS. Under the Deed of Assignment of Promissory Note, PBC continues to collect payments made by our client since BIS' OBU unit here is not geared up to do collection work. However, the Deed of Assignment of Promissory Note expressly provides that "1. All payments collected by PBC are considered funds belongings to BIS; "2. PBC shall hold such payments in trust for and for the account of BIS; "3. PBC cannot use such payments, or commingle them with its other funds; "4. PBC must keep separate accounting books for such payments. Moreover, the Deed of Assignment of Promissory Note further provides that at anytime BIS may, at its option, directly collect from our client payments under the Promissory Note. Any payment by our client that is credited or received by BIS operates to correspondingly reduce the amount of the Certificate of Deposit." cdtech In reply, I have the honor to inform you that the foregoing transaction is an onshore transaction because it involves a foreign currency loan transaction with a resident; hence, the gross interest income payments of your client on said loan is subject to the 10% final tax imposed by Section 24(f)(2) of the Tax Code. If the transaction is a direct loan by the local borrower from BIS, same is considered a foreign loan. However, since BIS is owned or controlled by the French government, the interest income due to BIS is exempt from the 15% withholding tax, pursuant to Section 29(c)(8)(A)(2) of the Tax Code. Very truly yours, (SGD.) ROMULO M. VILLA Acting Commissioner Bureau of Internal Revenue