VAT Ruling No. 067-97

November 12, 1997 VAT RULING NO. 067-97 Sec. 199; 000;067-97 Far East Bank & Trust Company Far East Bank Center Sen. Gil J. Puyat Avenue, Makati City Attention: Ms . Rowena T . Romero Sr . Manager-Actg . Dept . Gentlemen : This refers to your letter dated August 21, 1996 requesting for formal clarification on the following: casia "1. Considering that Far East Bank & Trust Company (FEBTC) is a non-VAT corporation, should the computation of the expanded withholding tax on income payments be inclusive of value added tax? "2. For GRT purposes, should the 20% final withholding tax on a bank's interest income form part of the bank's taxable gross receipts? In reply thereto, please be informed as follows: 1. The expanded withholding tax is based on income payment representing the purchase/contract price, net of the VAT. It should be noted that from the point of view of the recipient of income, that portion of the purchase/contract price which pertains to the value-added tax is not considered as income but the same is treated as a liability. For this reason, since the subject of the EWT covers income payments, only that portion of the purchase/contract price, exclusive of the VAT, shall be the basis of withholding. 2. Section 119 of the National Internal Revenue Code, as amended, provides thus: SEC. 119. Tax on banks and non-banks financial intermediaries . There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: (a) on interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived. Short-term maturity not in excess of two (2) years 5% Medium-term maturity over two years but not exceeding four (4) years 3% Long-term maturity: (i) Over four (4) years but not exceeding seven (7) years 1% (ii) Over seven (7) years 0% (b) On dividends 0% (c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Sec. 28 of this Code 5% Provided, however , That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or long term and the correct rate of tax shall be applied accordingly. xxx xxx xxx" In the case of income payments subject to withholding, such as interests earned by banks on their Philippine currency deposits, said interest income inclusive of the 20% final withholding shall form part of gross receipts of banks and non-bank financial intermediaries subject to the gross receipts tax of 5% pursuant to Section 119 (c) of the Tax Code, as amended. LLjur Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue