August 04, 1999

BIR RULING [DA-456-99]

Bankers Association of the Philippines

11th Floor, Sagittarius Condominium Bldg.
H. de la Costa St., Salcedo Village
Makati City

Attention: Mr. Miguel C . Andaya

Vice Chairman

Gentlemen :

This refers to your letter dated October 8, 1998 relative to your reaction and
comments on Revenue Regulations No. 10-98 and BSP Circular No. 177-98 with the
following questions and suggestions, viz: cdll

A. On Revenue Regulations No. 10-98

1. On Section 2.24(A)(2) thereof — That foreign currency deposit

joint account under the names of a non-resident and a resident
spouse/relative should be fully tax exempt.

2. On Secs. 2.24(B), 2.27, 2.27(B) and 2.58 thereof — You are

proposing

(i) further extension of the October deadline by another three

months; and

(ii) waiver of the prescribed documentary requirements

especially for matured and completed transactions with your
ex-clients during the first nine (9) months of 1998.

3. On Secs. 2.27 and 2.28(C) thereof — You have posed the

following queries:

(i) Will the income of the FCDU/OBU from foreign currency

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 transactions with residents be subject to Gross Receipt Tax
as well as Documentary Science Tax? In the case of foreign
banks' FCDU, will such income be subject to Profit
Remittance Tax? llcd

(ii) How will income be computed for transactions relating to

foreign exchange transactions and how will the "person
making income payments" be determined?

4. On Sec. 2.58 thereof — That you wish to defer the requirement on

the quarterly submission of lists of individual and corporate
depositors who are tax exempt and the requirement that depositors
should execute a written permission allowing the bank to divulge
their identity to the Bureau and that refusal to do so will mean loss
of tax exempt status until adequate assurance can be given to the
banks that they will not be facing any legal risk by complying with
the revenue regulations.

B. On BSP Circular No. 177-98 — That you wish to confirm that the manner of
payment of interest, whether in advance, periodically or at maturity, will in no
way affect the tax exempt status of said instrument.

In reply, please be informed as follows:

A. On Revenue Regulations No. 10-98

1. On Sec. 2.24(A)(2) — Although, as you have stated, the law does

not provide for partial tax exemption and that, as you have alleged,
"splitting" of tax exemption is arbitrary and extremely difficult to
comply with, we cannot just agree with you that we should fully
exempt from the final withholding tax requirements the interest
income derived from foreign currency bank deposit accounts
jointly made in the name of a non-resident citizen (e.g., an
overseas contract worker or a Filipino seaman) and a resident
spouse or dependent because the law specifically excepted only a
"non-resident individual." (Expressio unius est exclusio alterius.)
LibLex

2. On Secs. 2.24(B), 2.27 and 2.27(B) and 2.58 on your request for
extension of the October 25 deadline by another three months, we
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 regret to tell you that we cannot grant your request because we
have in fact given the banks engaged in the foreign currency
deposit and offshore banking system enough extension time to file
the tax returns for the first three taxable quarters of 1998 and pay
the corresponding taxes due thereon without incurring any penalty,
provided that the said taxes are duly paid not later than October 25,
1998.

Similarly, we are sorry that we cannot likewise grant your

request for waiver of the documentary requirements of proof of
non-residency of the depositor especially for matured and
completed transactions with your ex-clients during the first nine (9)
months of 1998 because of the principle that tax exemptions are
always construed in strictissimi juris and it is incumbent upon the
taxpayer to prove that he is indeed entitled to such tax exemption
by providing the evidentiary requirements as provided for under
Secs. 2.24(B) and 2.27(B) of Rev. Regs. No. 10-98, which a
non-resident citizen or non-resident alien or a non-resident foreign
corporation can easily provide, if required. Besides, we believe that
subject banks, gently suspicious as they always are with their
clients, could have expectantly required the subject documentary
requirements in anticipation of what the regulations on the matter
will provide. If at all, we can accept whatever best evidence
required by the banks as proof of non-residency of their clients but
only within the period requested. llcd

3. On Secs. 2.27 and 2.28(C) —

(i) Yes, the interest income derived by domestic depository

banks and OBUs under the expanded foreign currency
deposit system which is included in the gross receipts of the
bank (except interest income from long-term deposits with
maturity period of over seven (7) years shall be subject to
gross receipts tax because the term "bank" under R.A. No.
337, as amended, otherwise known as "The General
Banking Act," includes branches and agencies in the
Philippines of foreign banks. Thus, earnings under the
expanded foreign currency deposit system by the subject
banks forming part of their gross receipts shall be subject to
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 the gross receipts tax. Said interest income, however, is not
subject to documentary stamp tax because the Tax Code
does not impose documentary stamp tax on income derived
by a person.

On the other hand, any profit derived by an OBU

(which is a unit of a foreign bank authorized to engage in
business in the Phils. under the expanded foreign currency
deposit system) which is effectively connected with the
conduct of its banking business in the Philippines remitted
to its head office abroad shall be subject to a tax of 15%
which shall be based on the total profits applied or
earmarked for remittance without any deduction of the tax
component thereof (except banking transactions of OBUs
which are registered with the PEZA). cda

(ii) On the matter of how income will be computed for

transactions relating to foreign exchange and how the
"persons making income payments" are to be determined,
we will be very glad to further discuss this matter with the
banking industry thru the BAP Tax Committee, as you
suggested, and make the necessary amendment or
modification, if any, of the existing regulations, if need be.
However, we regret to say that we cannot defer the
implementation of this particular provision pending the
results of the aforesaid discussion with you because, so far,
we believe that the existing laws and regulations on the
matter are clear enough and unambiguous and have
provided enough measures on how to compute the income
from the said foreign currency transactions and how to
determine the said income payors, which simply means, of
course, to be those persons who pay the interest income.

4. On Sec. 2.58 re your request for deferment of the information

requirement on non-resident tax exempt depositors, we believe that
this provision is not really a violation of Sec. 2 of R.A. No. 1405,
entitled "An Act Prohibiting Disclosure of or Inquiry into, Deposits
with any Banking Institution and Providing Penalty Therefor", viz:

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 "Sec. 2. All deposits of whatever nature with banks or
banking institutions in the Philippines . . . are hereby considered as of
an absolutely confidential nature and may not be examined, inquired or
looked into by any person, government official, bureau or office,
EXCEPT UPON WRITTEN PERMISSION OF THE DEPOSITOR, . .
." cdphil

Sec. 2.58 of Rev. Regs. No. 10-98 provides that to avail of the
exemption from the tax on interest income from foreign currency
deposit, the depositor is required to execute a written permission
allowing its depository bank to inform the Commissioner that as a
non-resident, he is exempt from the tax and that the depositor who
fails to comply with this requirement shall not be entitled to the
exemption privilege. Again, we would like to reiterate the principle
that tax exemptions are always construed in strictissimi juris and it
is incumbent upon the taxpayer to prove that he is really entitled to
such exemption. Please take note that the confidentiality of the
bank deposits is not violated if there is a written permission from
the depositor allowing the depository bank to inform the
Commissioner that he is a non-resident, and as such, he is exempt
from the subject tax. Besides, what the regulations merely require
is a list of all non-resident persons and corporations who were
given exemption from the tax on interest income on foreign
currency deposits without necessarily examining, inquiring,
looking into nor divulging the amount of their deposits and the
corresponding interest income derived therefrom. cda

B. On BSP Circular No. 177-98, we have taken note of your confirmation that the
manner of payment of interest of long-term non-negotiable tax exempt
certificates of time deposits under Sec. 24(B)(1) of the Tax Code of 1997,
whether said payment of interest is in advance, periodically, or at maturity,
does not in any way affect the tax exempt status of said instrument.

However, it is our opinion that in order that the said long-term

non-negotiable tax-exempt certificates of time deposits can be exempt from
income tax, Sec. 24(B)(1) of the Tax Code provides that the holding period for
this investment portfolio shall be for a period of five (5) years. If it is
pre-terminated before the lapse of the 5-year period the interest yield shall be
subject to tax. cdtai

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 Very truly yours,

(SGD.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue

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