BIR Ruling No. 276-82

October 28, 1982 BIR RULING NO. 276-82 024 000-00 276-82 City Trust Banking Corporation Buendia Avenue Extension Makati, Metro Manila Attention: Mr . Caesar U . Querubin Executive Vice President Gentlemen : This refers to your letter dated April 13, 1982 requesting opinion as to the proper tax treatment of income arising from a Central Bank approved foreign currency swap transaction described as follows: cdt "Step 1: FCDU receives foreign currency from a non-resident and books said funds as time deposits to enable it to swap said deposit with WB. "Step 2: Per approval of the Central Bank of the foreign currency swap, the FCDU: (a) sells the foreign currency received as time deposit mentioned in step 1 to the CB and receives local currency (pesos) in consideration thereof; (b) simultaneously executes a contract with the CB to buy back the same foreign currency at an agreed rate for future delivery to protect itself from exchange risks. This foreign currency in turn will be used by the FCDU to pay back the aforementioned foreign currency deposit when it matures; (c) per CB swap approval, the bank is instructed to lend the proceeds of the foreign currency swap to a specific resident corporation, evidencing said lending by furnishing the CB with a copy of the Peso Promissory Note signed by said resident corporation, since the peso equivalent of the foreign currency liability is already fixed by virtue of the forward foreign exchange contract with the CB; and (d) the depositor/funder hypothecates the foreign currency deposit in favor of the FCDU to secure the specific resident corporation's loan. "Step 3: When the FCDU lends said proceeds of the Central Bank approved foreign currency swap transaction to the resident corporation, the charges which will be paid by the borrower are as follows: (a) Interest and Discount to reimburse the FCDU for the interest expense of the foreign currency deposit; (b) A minimum spread to make a profit; and (c) A service charge to cover its expenses in servicing the account inclusive of the premium incurred in purchasing the forward contract from the CB." In reply, I have the honor to inform you that the foregoing transaction is an onshore transaction because it involves a loan transaction with a resident. The gross interest income which is subject to the 10% final tax imposed by Section 24(f)(2) of the Tax Code consists of the interest and spread, in accordance with Section 2(h) of Revenue Regulations No. 10-76, as amended by Revenue Regulations No. 14-77 which reads as follows: cd "Gross onshore income shall mean gross interest income 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." The service charge is not subject to the 10% final tax. cdtech Very truly yours, RUBEN B. ANCHETA Acting Commissioner