Taxability of Interest Paid by Central Bank on Deposits of Banks Required to Be Maintained as Part of Legal Reserve

November 19, 1986 BIR RULING NO. 253-86 24 (e) 000-00 253-86 Gentlemen : This refers to your letter dated September 3, 1986, requesting a ruling whether the interest paid by the Central Bank on deposits of banks required to be maintained as part of legal reserve are subject to the final withholding tax of 20% imposed under Section 24(e) of the Tax Code, as amended by Executive Order No. 37. In reply please be informed that your request is answered in the negative. It is noted that said reserve is required to be maintained against the bank's deposit liabilities, "an order to control the volume of money created by the credit operations of the banking system." (Sec. 100, R.A. No. 265, as amended). Although said reserves ordinarily take the form of deposits with the Central Bank, they are not considered bank deposits, the interest on which is subject to withholding tax, under Section 24(e) of the Tax Code, as amended. Moreover, the said 20% final withholding tax does not apply to yield on debt instruments issued on interbank call loans to cover deficiency in reserve against deposit liabilities. (Sec. 3, Revenue Regulations No. 17-84). aisadc Very truly yours, (SGD.) ROMULO M. VILLA Acting Commissioner