BIR Ruling No. 104-84

May 29, 1984 BIR RULING NO. 104-84 24-f-000-00-104-84 Gentlemen : This refers to your letter dated May 19, 1983 requesting opinion as to whether or not the foreign currency loan obtained by the Maranaw Hotels and Resort Corporation (MHRC) from the Bank of Tokyo Ltd., of Japan through its Manila Offshore Banking Unit is considered a foreign loan for purposes of the tax credit incentives available to a registered tourism enterprise. Under P.D. No. 535, said enterprise shall be granted a tax credit for taxes withheld on interest payments on foreign loans as provided for in Section 7(f) of R.A. No. 5186 (now Art. 45(f), P.D. No. 1789) and defined under Section 3 thereof (now Art. 12, P.D. No. 1789). It is represented that on March 10, 1979, upon application of MHRC, the Central Bank authorized MHRC to obtain a US$4.0 million loan from the bank of Tokyo Ltd., Manila Offshore Branch to refinance its maturing loan obligation with Numura Europe N.V. of Amsterdam, and to finance importation of building equipment including spare parts and kitchen utensils to be used in the additional 60 rooms of the Century Park Sheraton; that the aforesaid loan of MHRC was duly registered with the Central Bank under Registration No. CB-MEDIAD (FB) 82-1375. In reply thereto, I have the honor to inform you that Article 12 of P.D. No. 1789 otherwise known as the Omnibus Investments Code defines "Foreign Loan" as any credit facility or financial assistance other than equity investment obtained by a registered enterprise from a source outside the Philippines and brought into the Philippines either in foreign exchange or in other assets, and registered with the Central Bank and the Board, which shall assess and appraise the assets other than foreign exchange representing the proceeds of the loan. This definition of a foreign loan does not include a foreign currency loan granted by an offshore banking unit, such as the above loan obtained by MHRC from the Bank of Tokyo, Manila Offshore Branch. In fact, under our internal revenue law, a foreign loan differs from a foreign currency loan granted by an offshore banking unit in the sense that the interest income under the former is subject to the 15% withholding tax [Sec. 24(b) (l)(ii) in relation to Sec. 53(c)(2), Tax Code] while the interest income derived from the latter is subject to the 10% final withholding tax [Sec. 24(f)(l), Ibid )]. The aforementioned foreign currency loan obtained by MHRC from the Bank of Tokyo, Manila Offshore Branch is not a foreign loan as defined in Article 12 of P.D. No. 1789; hence, MHRC is not entitled to avail of the tax credit for taxes withheld on interest payments on said loan under Article 45(f) of P.D. No. 1789. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner