Interest Payments of PhilBank to PDIC on Account of the Loan Obtained by the Former from the Latter are Not Subject to the 20% Final Withholding Tax

June 24, 1991 BIR RULING NO. 140-91 24 (e) (1) 000-00 140-91 Gentlemen : This refers to your letter dated February 20, 1991 reiterating your request for a ruling on whether or not interest payments on the emergency loan obtained by your Bank from the Philippine Deposit Insurance Corporation (PDIC) are subject to 20% withholding tax. cdt The records disclosed that in view of the rehabilitation program for the Philippine Banking Corporation (PhilBank) as approved by the Monetary Board under Resolution No. 481 dated June 16, 1989 and by the PDIC Board of Directors under Resolution No. 89-09-101 dated September 4, 1989, the PDIC has agreed to extend to PhilBank a credit line of P500 M, by way of financial assistance to PhilBank to be used wholly and completely in its financial condition especially for the adequate protection of its depositors; that said loan is payable in ten (10) years from January 2, 1989 with a grace period of two (2) years as principal, which shall be payable in eight (8) equal installments beginning at the end of the third year; that effective January 2, 1989, the interest of the loan shall be 13% per annum and shall be due and payable on each interest payment date (i.e. the last day of each interest period commencing from January 2, 1989 having a duration of 360 days, and each period thereafter having a duration of 360 days); and finally, the said loan is secured by assets of the Bank amounting in the aggregate amount of P400 M and in addition, by properties and improvements housing fifteen (15) branches of the Bank. In reply, please be informed that Section 24 (e) (1) of the Tax Code as amended provides that 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 shall be subject to a 20% final withholding tax. cdtech It is stipulated in the Loan Agreement executed by and between PhilBank and PDIC that PhilBank shall pay effective January 2, 1989 an interest of said loan at "13% per annum and shall be due and payable on each interest payment date." [Sec. 1 (1.06); Sec. 2 (2.03) Agreement] Indubitably, the transaction between PDIC and PhilBank as well as the interest income of PDIC as a result thereof are not within the contemplation of Section 24 (e) (1) of the Tax Code. Such being the case, the interest payments of PhilBank to PDIC on account of the loan obtained by the former from the latter are not subject to the 20% final withholding tax imposed by Section 24 (e) (1) of the Tax Code as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner