Interest Income of Non-resident Foreign Corporations Subject to the Preferential Tax Rate of 15% Withholding Tax

September 8, 1998 BIR RULING NO. 127-98 000-00-127-98 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Gentlemen : This refers to your letter dated June 10, 1998 requesting on behalf of your clients, Banker's Trust Company Singapore (BTCS) and Bankers Trust International Asia Ltd. (BTIA), for a ruling that the interest income of BTCS and BTIA, both non-resident foreign corporations, from peso placements or deposits in the Philippines is subject to the preferential tax rate of 15% withholding tax pursuant to Article 11(2) of the RP-Singapore Tax Treaty, as implemented by Revenue Regulations No. 7-82. LLpr It is represented that BTCS and BTIA are corporations organized and existing under the laws of Singapore; that in 1997, BTCS and BTIA entered into several Philippine peso placements with Deutsche Bank, Manila Branch which will mature in 1998, that the interest income earned by BTCS and BTIA on these peso placements representing the discount given by Deutsche Bank were subjected to withholding tax at the rate of 20%; that it is part of the business purpose for which BTCS and BTIA were formed to invest and make placements with the end view of making profits for their respective companies; that for this reason, they intend to venture and invest in peso placements with the banking industries all over Asia; that BTCS and BTIA do not engage in trade or business in the Philippines through a permanent establishment; and that their sole business activity in the Philippines is their peso placements in Deutsche Bank, Manila Branch. In reply, please be informed that Article 11(2) and (3) of the RP-Singapore Tax Treaty provide, viz: "Article 11 "Interest "(1) . . . "(2) However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting State shall by mutual agreement settle the mode of application of this limitation. "(3) The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. llcd xxx xxx xxx" Moreover, Section 13(2)(c) of Revenue Regulations No. 7-82 provides: "SEC. 13. Interest . "(1) . . . "(2) Interest arising in the Philippines and paid to a resident of Singapore is taxed as follows: (a) Exempted if paid in respect of a loan made, guaranteed or insured by such institutions as are specified and agreed in letters exchanged between competent authorities of the Philippines and Singapore; (b) 10% of the gross amount of interest in respect of public issues of bonds, debentures or similar obligations and paid by a Philippine company; (c) 15% of the gross amount of interest in all other cases. considering that the interest income derived by BTCS and BTIA in the Philippines does not arise from (a) and (b) of Section 13(2) of Revenue Regulations No. 7-82, implementing the RP-Singapore Tax Treaty and considering further that peso placement partakes the nature of an ordinary deposit, its interest income derived from the peso placements in the Philippines by BTCS and BTIA are subject to the preferential tax rate of 15% withholding tax imposed under Section 13(2)(c) of Revenue Regulations No. 7-82. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. dctai Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue