A final withholding tax of seven and a half percent (7-1/2%) is imposed on interest income which is actually or constructively received by a resident from a foreign currency deposit. This tax applies to such deposits accepted and held by an OBU or FCDU in the regular course of business.

No tax is imposed on interest income received by a non-resident from foreign currency bank deposits. A non-resident refers to an individual, corporation or other juridical person which is not any of the following:

• A Filipino citizen living in the Philippines;
• An alien individual who is permanently residing in the Philippines
• A domestic corporation, which refers to a corporation or other juridical person (associations, partnerships, trust, etc.) organized under the laws of the Philippines
• A resident foreign corporation, which refers to a branch, extension office or other unit of corporations or juridical persons organized under the laws of any foreign country which is doing business in the Philippines.

Individuals may present any of the following documents to the bank to prove non-residency:

• An immigration visa issued by the foreign government in the country where he is a resident of;
• A certificate of residency which is issued by the Philippine embassy or Consulate in the foreign country of his residence;
• A certificate of the contract of employment of an overseas contract worker who is duly registered with the Philippine Overseas Employment Agency (POEA); or a Seaman’s Certificate, in the case of a Filipino seaman;
• A certification from the Bureau of Immigration that a non-resident alien is not a resident of the Philippines;
• A certification from the Department of Foreign Affairs (DFA) of the Philippines that the individual is a regular member of the diplomatic corps of a foreign government and is entitled to income tax exemption under the international agreement to which the Philippines is a signatory.

For corporate depositors, the original or certified copy of all the following must be presented:

1. Certificate of registration of the corporation abroad; and
2. Certification from the Securities and Exchange Commission that the non-resident corporation is not licensed to do business in the Philippines.

To be entitled to an exemption from the tax on interest income on foreign currency deposit, the foreign currency bank account should be in the name of the non-resident individual or non-resident corporation. Otherwise, the interest income shall be considered as subject to the 7.5% final tax.

In addition, the depositor is required to execute a written permission allowing its depository bank to inform the BIR that, as a non-resident, he is exempt from the tax. Without this written permission, which constitutes a limited waiver of the confidentiality of foreign currency deposits, the depositor will not be entitled to exemption privilege.

If the account is jointly in the name of a non-resident such as an overseas contract worker, or a Filipino seaman, and an individual (spouse or dependent) who is living in the Philippines, fifty percent (50%) of the interest income from such bank deposit will be treated as exempt while the other fifty percent (50%) shall be subject to a final withholding tax of seven and one-half percent (7.5%).

The regulation shall apply to taxable income derived beginning January 1, 1998. For deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 shall be subject to the final tax.

The depository bank shall withhold and remit the 7.5% tax due from the interest income derived by a resident from his/its foreign currency bank deposit. Unless the depositor presents documentary evidence that he/it is not a resident of the Philippines, the bank shall automatically withhold such tax.

The depository bank is required to submit a list of all persons and corporations who were given exemption from the tax on interest income on foreign currency deposits. The list will be filed at the same time that the quarterly withholding taxes on such deposits are remitted to the BIR.

FCDU, or Foreign Currency Deposit Unit, refers to that unit of a thrift bank or commercial bank organized under Philippine laws, or a local branch of a foreign bank doing business in the Philippines which have been authorized by the Bangko Sentral ng Pilipinas (BSP) to engage in foreign currency denominated transactions.

OBU, or Offshore Banking Unit, refers to a branch, subsidiary, or affiliate of a foreign banking corporation which is duly authorized by the BSP to transact offshore banking business in the Philippines.

A final withholding tax of ten percent (10%) will be imposed on income derived by an FCDU or OBU from foreign currency transactions with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system. This includes interest income from lending operations, bank charges, commissions, services fees and net foreign exchange transaction gains.

The person making the income payment to the FCDU or OBU is required to withhold and remit the tax withheld. Thus, in the case of interest payment by a resident on a foreign currency loan from an OBU or FCDU, the resident borrower will act as the withholding agent of the 10% final withholding tax.

Income derived by FCDUs or OBUs from activities other than foreign currency transactions will be subject to the regular tax imposed on such income when received by a domestic corporation or resident foreign corporation, as the case may be. Thus, they are required to file the corporate income tax return with respect to their income subject to the regular corporate income tax. The return shall also declare all other withholding taxes, the fact that such final withholding taxes have been withheld, and shall indicate the following information:

• Name of withholding agents;
• His/its address;
• His/its Taxpayer Identification Number (TIN);
• Period covered;
• Gross income;
• rate of final withholding tax applied; and
• Amount of final withholding tax withheld.

There is no need, however, to submit such information with respect to its interest income derived from bank deposits.

Income of FCDUs or OBUS from foreign currency transactions with non-residents of the Philippines are not subject to income tax.

No penalty will be imposed for late payment of the taxes prescribed in this regulations for the first three quarters of calendar year 1998, if the taxpayer files the returns for the said taxable quarters and pays the taxes due on or before October 25, 1998.