Exemption from the 10% Withholding Tax — Interest Payable

November 6, 1981 BIR RULING NO. 214-81 24-f 000-00 214-81 Asia Brewery Incorporated 4th Floor, Allied Bank Center 6754 Ayala Avenue, Makati, Metro Manila Attention: Mr . Domingo T . Chua Director Gentlemen : This refers to your letter dated October 28, 1981 requesting confirmation of your opinion that the 10% withholding tax imposed by Section 24(f) of the Tax Code, on gross onshore income derived by the Foreign Currency Deposit Unit (FCDU) on a foreign currency loan transaction should be based on the actual interest income, exclusive of all other costs, fees and charges. cdta Your above request is based on the following representation of facts: "A group of foreign banks placed on deposit with a syndicate of local banks (booked at the latter's FCDU) the amount of Sixty Million (U.S. $60,000,000.-) U.S. Dollars, on which interest is being paid at the amount equivalent to prevailing London Interbank offered rate (Libor) plus a margin of one (1%) percent. "In turn, the FCDU had lent the same amount of dollars to a resident borrower-Asia Brewery Incorporated. In the loan agreement executed for this purpose, it is provided in Section 2.08 that: " Interest . The borrower shall pay the Lenders on each Interest Payment Date, interest in an amount equivalent to the interest payable by the lenders to the depositors under the Deposit Agreement for the particular interest payment date, and in addition a spread of one and one-half (1.5%) percent. (the "spread"). In reply, please be informed that your request is answered in the affirmative. Section 1 of Revenue Regulations No. 14-77, which amended Section 2(h) of Revenue Regulations No. 10-76 defines gross onshore income as follows: Sec. 2(h). Gross onshore income shall mean gross interest arising from foreign currency loans and advances to and/or investments with residents made by offshore banking units or expanded foreign currency deposit units. In the case of foreign currency loan transactions, such gross interest income shall refer only to the stipulated interest and shall not include any and all fees, commissions and other charges which are integral parts of the income from the above transactions. Accordingly, the 10% withholding tax shall be based on the spread of 12% since the same represents the gross interest income of the FCDU. The interest to be paid by you to the lenders which is equivalent to the interest payable by the latter to the depositors shall not be subject to the 10% withholding tax. It should be noted that said interest paid by the lenders to the depositors is interest on dollar deposit which is exempt from income tax, pursuant to Section 6 of Republic Act No. 6426 otherwise known as the Foreign Currency Deposit Act. cdti The other charges (margin of 1%) on the loan are not also subject to the 10% withholding tax since the same are not included within the term "gross onshore income" as defined in the above-quoted provision of Revenue Regulations No. 14-77. Very truly yours, RUBEN B. ANCHETA Acting Commissioner