15% Withholding Tax — Interest Income on Foreign Loans

May 20, 1981 BIR RULING NO. 086-81 53-b 000-00 086-81 Domestic Satellite Philippines, Inc. 5th Floor, Madrigal Building Ayala Avenue, Makati, Metro Manila Attention: Mr . Manuel H . Nieto, Jr . President Gentlemen : This refers to your letter dated December 12, 1980 requesting (1) exemption from the payment of the 15% withholding tax on interest on foreign loan; and (2) that the said tax amounting to P3,626,355.45 which you paid so far through the Philippine National Bank be refunded to you. You have represented that you are engaged in the transmission of telecommunications and television program through satellite; that you contracted with various foreign lenders substantial financing for the acquisition of your equipment and initial operations; that in the loan agreements you entered into with said foreign lenders, it is stipulated that you shall shoulder the 15% withholding tax on the interest income earned on said foreign loans; and that under Presidential Decree No. 947, you are subject to a franchise tax of % of gross earnings "in lieu of all taxes". In reply, I have the honor to inform you that the 15% withholding tax which you paid through the PNB is in reality the income tax due from the foreign lenders on the interest income which they derive on the foreign loan, contracted by you with said lenders. Under Section 24(b) (1) (ii) of the Tax Code, a foreign corporation not engaged in trade or business in the Philippines shall pay income tax equal to 15% of the interest on foreign loan. Under Section 53(b)(2) of the Tax Code, interest on foreign loans should be subject to the 15% withholding tax. On the other hand, the franchise tax payable by you in lieu of all taxes is a commutation tax which is a substitute for all other taxes that could be validly imposed and collected from you. (Philippine Airlines vs. Collector of Internal Revenue, CTA Case No. 45, February 8, 1956). In other words, on account of your payment of the franchise tax, you are exempt from all other taxes for which you are directly liable. Consequently, said taxes do not include the withholding tax in question which, as hereinbefore stated, is the liability of the non-resident corporation. It should be noted that your withholding and payment of the tax due thereon as required by Sections 53 and 54 of the Tax Code, is an administrative device to insure collection of the tax on said interest earned in the Philippines by said foreign lenders who are not doing business in the Philippines and have no office or agent here. (British Trader's Insurance Co., Ltd. vs. Commissioner of Internal Revenue, G.R. No. L-20501, April 30, 1965) In view, thereof, this Office is of the opinion, as it hereby holds, that based on the "in lieu of all taxes" provision of your franchise, you are not exempt from payment of the 15% withholding tax due on the interest income on foreign loans derived by your non-resident foreign lenders. Such being the case, said 15% withholding tax which you have paid was legally collected and, therefore, you are not entitled to the refund thereof. Very truly yours, RUBEN B. ANCHETA Acting Commissioner