BIR Ruling [UN-084-95]

February 1995 BIR RULING [UN-084-95] MEMORANDUM FOR The Commissioner This refers to the proposed assessment against the Chase Manhattan Bank, N.A., 15/F Pacific Star Bldg., Makati Metro Manila involving the amount of P37,935,013.18 representing deficiency gross onshore tax for the year 1990. Records of this case disclosed that the Chase Manhattan Bank is a corporation organized and existing under the laws of the United States with head office in New York, U.S.A; that it is authorized by the Central Bank of the Philippines to operate as an Offshore Banking Unit (OBU) in the Philippines pursuant to Presidential Decree No. 1034; that the Examiner proposed to assess the Chase Manhattan Bank 10% gross onshore tax on the interest income derived by its OBU unit from dollar loans granted to PAL, PNOC, DBP and the CB with the Republic of the Philippines as guarantor; that on January 3 and February 7, 1994, counsel for Chase Manhattan Bank protested the aforesaid proposed assessment on the following grounds: (1) that the interest income derived by Chase Manhattan Bank on foreign loans granted to PAL, PNOC, DBP and the CB should be excluded from the computation of the 10% tax on gross onshore income of the Chase Manhattan Bank under Section 25(a)(6)(B) of the Tax Code, as amended because the said corporations and/or entities have assumed the obligation to pay all direct and indirect taxes due on all income including interest income derived from foreign loans; (2) that it is a standard covenant in almost all foreign loan agreements, as part of international banking practice, that Philippine withholding tax on interest is passed on to or required to be assumed by the borrowers; and (3) that the CB, PNOC, PAL and DBP are exempt from paying the withholding tax applicable to interest on foreign currency loans by express provision of the law or the Charter creating them. Accordingly, Chase Manhattan Bank is not liable for the 10% tax on its gross onshore income which was assumed by the CB, PNOC, PAL and the DBP. However, the Examiner is of the opinion that since the 10% gross onshore tax is a tax on the creditor bank (Chase-Manhattan Bank N.A.) the exemption privilege of the Borrower (CB, DBP, PNOC and PAL) from paying the withholding tax applicable to interest on foreign currency loans by express provision of the law or the charter creating them does not extend to Chase Manhattan Bank. Pursuant to Section 5(b) of Revenue Regulations No. 10-76 as amended by Revenue Regulations No. 14-77 onshore income realized by an offshore banking unit or by an expanded Foreign Currency Deposit Unit need not be included in the quarterly income tax return to be filed by the OBU/FCDU, PAL, PNOC, DBP, and the CB as the payor borrowers under Section 50 in relation to Section 51 both of the Tax Code, as amended are constituted as the withholding agents charged with the obligation of deducting, withholding and remitting to the Commissioner of Internal Revenue the income tax due thereon. Said onshore income is not therefore taxable to the OBU/FCDU even if the borrower is not tax-exempt. Moreover, in Revenue Memorandum Circular No. 46-77 publishing the answers to the suggestions/questions regarding the interpretation of certain provisions of P.D. Nos. 1034 and 1035 as implemented by Revenue Regulations No. 1-76, this Office has adopted the policy that where the domestic borrower is tax-exempt and such borrower assumed to pay the tax de on the loan transaction, this Office will not run after the lending OBU, should the domestic borrower default in the payment of its assumed liability. Furthermore, the respective characters of the CB, PAL, PNOC and the DBP provides for their exemption both as to principal and interest on foreign loans contracted by them from any and all taxes if the payment of such taxes has been assumed by them. Such being the case, CB, PAL, PNOC and the DBP as the payor-borrowers are constituted as the withholding agents charged with the obligation of deducting, withholding and remitting to this Office the income tax due on the onshore income of the OBU unit of Chase Manhattan Bank, N.A., although they are specifically exempt under their respective charters both as to principal and interests on foreign loan contracted by them from any and all taxes if the payment of such taxes has been assumed by them. Chase Manhattan Bank, N.A., cannot therefore be held liable to the payment of the aforementioned deficiency gross onshore tax for the year 1990. Moreover, it is the policy of this Office so stated in Revenue Memorandum Circular No. 46-77 that where the domestic borrower is tax-exempt and such borrower assumes to pay the tax due or the loan transaction, this Office will not run after the lending OBU-FCDU should the domestic borrower default in the payment of its assumed liability. In view thereof, it is respectfully recommended that the proposed assessment against the Chase Manhattan Bank, N.A. involving the amount of P37,935,013.18 representing deficiency gross onshore tax for the year 1990 should not be given due course and this case considered closed. MILAGROS V. REGALADO Chief, Law Division (Officer-In-Charge) I CONCUR: ALICIA P. CLEMENO Acting Assistant Commissioner (Legal Service) APPROVED: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue