Whether the Interest Income of the Local Government Infrastructure Fund Deposits with the Land Bank of the Philippines is Exempt from the 20% Final Withholding Tax

October 12, 1995 BIR RULING NO. 157-95 24 (e); 28 (b) (6) 000-00 157-95 Local Government Infrastructure Fund-Project Management Office (LGIF-PMO) Suite 3-A JMT Corporate Condominium ADB Avenue, Ortigas Center Pasig City Attention: Mr . Apolo C . Jucaban Project Director Gentlemen : This refers to your letter dated April 19, 1995 requesting, in effect, for a ruling that the interest income of the Local Government Infrastructure Fund (LGIF) deposits with the Land Bank of the Philippines South Harbor branch is exempt from the 20% final withholding tax. It is represented that the LGIF is a grant from the United States Agency for International Development (USAID) which aims to construct small scale infrastructure projects in selected local governments; that the grant funds are released to the local governments on the basis of physical accomplishments of the facilities being constructed like public markets, bus of jeepney terminals, access roads and schools; that the funds from the donor agency are deposited with the Land Bank of the Philippines before they are released in stages to the local governments; that pending release of the grant funds to the intended beneficiaries, it is temporarily deposited with the Land Bank of the Philippines where in the meantime, it earns interest that since the release of such funds to the recipients is subject to a number of conditions dictated by the grantor and cannot be disbursed at will by you, the grantor remains the virtual owner of the principal deposit; hence, the earner of the interest; and that under Section 8.4(a), Art. 8 of the Project Grant Standard Provision, the Project Grant Agreement and the Grant will be free from any taxation or fees imposed under the laws in effect in the territory of the Grantee. In reply, please be informed that pursuant to section 28(b)(8)(A) of the tax Code, as amended, interests on deposits in banks in the Philippines by foreign governments shall not be included in the gross income and shall be exempt from Philippine income tax; hence, interest earnings of the grant deposited with the Land Bank of the Philippines are exempt from the 20% final tax. This serves as the authority of the depository bank to forego the withholding of 20% final tax imposed on interest income from bank deposits maintained by the Local Government Infrastructure Fund. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue