Withholding Tax Rate Applicable to the Interest of Released Reinsurance Premium Reserves

September 10, 1991 BIR RULING NO. 181-91 24 (b) 181-91 Gentlemen : This refers to your letter dated January 24, 1990 inquiring about the withholding tax rate applicable to the interest of released reinsurance premium reserves. It is represented that People's Trans-East Asia Insurance Corporation is a domestic corporation with an existing reinsurance treaty with the Yasuda Fire and Marine Insurance Company, Ltd. of Japan; that part of your reinsurance premiums solicited within the Philippines is ceded to the reinsurer while part is withheld as reserve; that said reserve earns interest upon its release; that it is your practice to withhold 35% on the said interest, in compliance with then sub-section (b), Section 24 of the Tax Code, as amended; and finally that your reinsurer informed you that the applicable rate is 15%, instead of the 35% aforementioned, pursuant to the RP-Japan Tax Treaty. In reply, please be informed that Article II of the RP-Japan Tax Treaty provides in part that interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures, and 15 per cent of the gross amount of the interest in all other cases. The term "interest" as used in Article II of said Treaty 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. Based on all the foregoing, it is the opinion of this Office as it hereby holds that the tax rate that should be applied to the gross amount of the interest earned by the reinsurer on the reserve amount withheld by the domestic insurance company from the reinsurance premiums collected by the latter within the Philippines is 15%. cdta Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge