Taxability of Interest Income from Foreign Currency Bank Deposit and from Foreign Currency Transactions

July 13, 1999 BIR RULING NO. 103-99 27 (D) (1)-00-00-103-99 Asian Bank Corporation Lacson cor. Luzurriaga Sts. Bacolod City Attention: Mr . Jose Luis San Agustin Senior Manager Gentlemen : This refers to your letter dated August 23, 1998 addressed to Assistant Regional Director Merlinda Ordoyo, Revenue Region No. 12, Bacolod City, which was faxed to this Office relative to your request for ruling regarding the applicable rate of tax to be withheld on the interest income received by a Foreign Currency Deposit Unit (FCDU) from another Foreign Currency Deposit Unit (FCDU) on its foreign currency transactions. It is represented that "1. Westmont Bank is a Foreign Currency Deposit Unit (FCDU) and Asian Bank is also an FCDU; "2. Westmont Bank received interest income from foreign currency deposit transaction from Asian Bank." In reply, please be informed that Sec. 2.27 (A) of Revenue Regulations No. 10-98 explicitly provides that interest income actually or constructively received by a domestic corporation or a resident foreign corporation from a foreign currency bank deposit shall be subject to a final withholding tax at the rate of 7.5% based on the gross amount of such interest income. On the other hand, par. (C) of said Section provides that income derived by an FCDU or an OBU from foreign currency transaction with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system, shall be subject to a final withholding tax of 10% based on gross income. In short, par. (A) refers to interest income derived by a domestic corporation or a resident foreign corporation from a depository bank under the foreign currency bank deposit system while par. (C) pertains to income derived by an FCDU or OBU from foreign currency transactions , such as interest income from lending operations including bank charges, commissions, service fees, and net foreign exchange transaction gains. Accordingly, the interest income derived by Westmont Bank from foreign currency bank deposit with Asian Bank shall be subject to 7.5% final withholding tax while the interest income it derives from foreign currency transactions shall be subject to 10% final withholding tax. LibLex Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue