Transfer or Conversion of Foreign Currency Deposits into Regular Demand Deposits in Pesos Subject to 1% Transaction Tax

November 5, 1985 BIR RULING NO. 197-85 260-A 166-85 197-85 Gentlemen : This refers to your letter dated September 16, 1985 requesting reconsideration of our previous ruling that the transfer or conversion of foreign currency deposits of the Bureau of Treasury with the Central Bank of the Philippines into regular demand deposits in pesos, which in turn are availed of by government agencies/corporations as foreign loans is a foreign exchange transaction subject to 1% transaction tax imposed under Section 260-A of the Tax Code, as amended by P.D. No. 1959 and implemented by Revenue Regulations No. 16-84. You stated in your aforesaid letter that under paragraph 3 of Schedule I Withdrawal of Proceeds of the Loan, of the Loan Agreement between the Republic of the Philippines and the World Bank, it is provided that "the disbursement percentages and rates have been calculated in compliance with the policy of the Bank that no proceeds of the loan shall be disbursed on account of payment for taxes levied by, or in the territory of the borrower, on goods or services or on the importation, manufacture, procurement or supply thereof . . .". Hence, your request that the said bank account transfers covering foreign loans of the government agencies and government corporations be treated as not falling within the coverage of the 1% tax on foreign transaction. In reply thereto, I have the honor to inform you that, for lack of legal basis, your request cannot be granted. The 1% foreign exchange transaction tax is an additional tax on banks, non-bank financial intermediaries and other foreign exchange dealers. Even if the said tax was passed on to that Bureau when the Central Bank in transferring or converting your foreign currency deposit to regular demand deposit in pesos, your latter account is credited net of the 1% tax, the Central Bank is still considered the party liable to the payment thereof and the tax passed on to that Bureau or to the borrowers shall form part of the cost of purchase/sale of foreign exchange. (BIR Ruling No. 260-A-032-85-163-85). Such being the case, it is believed that there is no inconsistency with the policy set forth in the Loan Agreement between the Republic of the Philippines and the World Bank, because no proceeds of the foreign loan is being disbursed on account of payment of taxes. Very truly yours, (SGD.) TOMAS C. TOLEDO Acting Commissioner