Taxability of the Central Bank of the Philippines' Interest Income Derived from the Government's Industrial Fund Loan Program

April 20, 1992 BIR RULING NO. 124-92 119 (a) 000-00 124-92 Development Bank of the Philippines Makati, Metro Manila Attention: Ms . Teresa A . Belardo Officer-in-Charge Special Government Accounts Office of the Treasurer Gentlemen : This refers to your letter dated October 23, 1991 requesting in effect a ruling on the Central Bank's contention that its interest income from the government's Industrial Fund Loan Program (IFLP) is subject to gross receipts tax ranging from 0% to 5% instead of the 20% tax withheld by your bank. A brief background of CB's position is stated below: "1. The government set up an industrial finance fund to assist industries in the rationalization of their finances, Administrator of the fund is the Central Bank. "2. Several financial institutions agreed to prepare financial strategy for companies identified to be in financial distress. DBP was one of the government financial institutions who availed of this fund. The proceeds of the loan were in turn relent to help industrial companies such as Alfa Integrated Textile Mills, Continental Manufacturing Corporation, Mabuhay Vinyl Corporation and the Construction and Development Corporation of the Philippines now Philippine National Construction Corporation in their rehabilitation and refinancing of their matured and maturing obligations. "3. The loan has the following features: Amount of Loan P60.0 MM to P352.0 MM Term 7 to 10 years maturity inclusive of two (2) years grace period No. of Installments 10 to 17 equal semi-annual installments Interest Rates Fixed at 11.44 p.m. "4. The basis of CB in using the 0% to 5% tax bracket for interest income on its lending activity is Sec. 119 of the National Internal Revenue Code, as amended by P.D. No. 1739 which takes into consideration the maturity of the loan. "The DPB's levying of a straight 20% tax on CB's interest income on the other hand, was premised on the provision of Revenue Regulations No. 10-86 and Executive Order No. 93 issued on 17 December 1986 which however applies only to interest income on time and savings deposits. "5. For the period April 1987 to October 1989, the DBP collected withholding taxes equivalent to 20% of the interest earnings of CB on the above-mentioned program. Accordingly, the CB has been requesting for a refund corresponding to the rates differential as P15,897,130.55. Of the 15.9 MM, P13,968,439.05 was remitted to the Bureau of the Internal Revenue through an existing off setting arrangement between the Bureau of the Treasury and the former. The balance of P1,928,691.50 still remains as outstanding in our books pending receipt of your official position on the matter." Based on the foregoing representations, you now request in effect a ruling on the appropriate tax rate to be charged on CB's earnings under the IFLP. In reply, please be informed that under Section 24(e)(1) of the Tax Code, as amended, interest on Philippine currency bank deposits and yield on any other monetary benefit from deposit substitutes and from trust fund and similar arrangements received by domestic corporations; and royalties, derived from sources within the Philippines, shall be subject to a 20% tax. On the other hand, under Section 119(a) of the same Code, a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries, shall be collected, on interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived, in accordance with the following schedule: Short-term maturity not in excess of two (2) years 5% Medium-term maturity over two years but not exceeding four (4) years 3% Long-term maturity: (i) Over four (4) years but not exceeding seven (7) years 1% (ii) Over seven (7) years 0% From the foregoing provisions of the Tax Code, it is clear that the Central Bank of the Philippines is subject not only to the gross receipts tax imposed under Section 119(a) of the Tax Code on the interest it derived from the government's Industrial Fund Loan Program but also to the 35% income tax rate prescribed under Section 24(a) of the Tax Code on its interest income under the IFLP which should be reported in its Annual Corporate Income Tax Return. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue