Interest Income Derived by Rural Banks from Savings/Time Deposit and Deposit Substitute Subject to Final Withholding Tax

September 5, 1986 BIR RULING NO. 159-86 51 (a) 000-00 159-86 Gentlemen : In reply to your letter dated August 20, 1986, please be informed as follows: 1. Interest income derived by Rural Banks from Philippine Currency savings/time deposit and deposit substitute is subject to final withholding tax, pursuant to Sections 24(cc) and 53(d)(1) of the National Internal Revenue Code, as amended by PD 1959 and as implemented by Revenue Memorandum Circular No. 11-84 dated October 30, 1984. Effective January 1, 1986, the final withholding tax on such interest income was 17 1/2%, pursuant to Section 24(d) of the Tax Code, as amended by PD 1994. Effective August 1, 1986 the tax rate had been increased to 20%, pursuant to the provisions of Section 24(e) of the Tax Code, as amended by Executive Order No. 37. This final withholding tax applies to Rural Banks notwithstanding PD 2026 in relation to PD 1955. To clarify this point it may be stated that on October 15, 1984, two (2) separate and distinct laws were promulgated namely: (a) PD 1955 which repealed all tax exemptions and preferential tax privileges previously enjoyed by certain persons under various laws, except for entities enumerated in Section 1 of PD 1955 (BOI registered entities, etc.) whose exemptions were retained, provided the President of the Philippines may restore any of the exemption/s which have been withdrawn by PD 1955; and (b) PD 1959 which amended Section 21(d), 24(cc) and 53(d)(1) of the Tax Code. Exemptions, and preferential tax treatment re interest income from bank deposit and deposit substitute have been withdrawn, whether or not the exemption arises under the provisions of the Tax Code or other laws. " The exemption from withholding tax, if the recipient (individual or corporation) of the interest income is exempt from taxation: and the imposition of the preferential tax rates if the recipient of the income is enjoying preferential income tax treatment were both abolished ." (FEATURES OF PD 1959, par. 3, RMC NO. 31-84) Consequently, even those entities whose tax exemptions have been retained by PD 1955 became subject to final withholding tax on interest income from bank deposit and deposit substitute since the controlling law in this connection is PD 1959 not PD 1955. When PD 2026 amended PD 1955 to restore the tax exemption previously enjoyed by Rural Banks under R.A. 720 as amended, the tax status of Rural Banks did not become any better than those entities whose exemptions were retained by PD 1955 because Rural Banks have only been restored to their original tax status. Based on their original tax status Rural Banks would have nevertheless lost tax exemption in connection with interest income derived from bank deposit and deposit substitute. Therefore, PD 2026 which merely restored the banks' exempt status (previously withdrawn by PD 1955) cannot be considered as to have amended PD 1959. For this reason, the banks' interest income from bank deposit and deposit substitute remain subject to the final withholding tax effective October 15, 1984. 2. With respect to capital gains derived by Rural Banks arising from sale of acquired assets, including other income (except interest income from bank deposit and deposit substitute), beginning the effectivity date of PD 2026 (February 3, 1986) said banks henceforth became again exempted from taxation, subject to limitations prescribed in Section 1 thereof, i.e., the bank's net assets shall not exceed P30 million pesos and the exemption shall be effective only for a period of five (5) years from the effectivity of PD 2026. 3. Rural Banks which paid final withholding taxes on their interest income from bank deposit and deposit substitute may not claim refund or credit for the said tax payments as the same were withheld and remitted to this Office in accordance with the provisions of law (Sections 21(d), 24(cc) and 53(d)(1) of the Tax Code, as amended by PD 1959). This revokes any BIR Ruling which is inconsistent herewith. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner