CTA says only FCDU transactions with banks are subject to tax

BY PAUL C.H. HOW, Reporter/BusinessWorld Foreign currency deposit unit (FCDU) transactions are subject to a 10% onshore income tax only when done with local commercial banks and local branches of foreign banks. FCDU transactions involving any other local residents are not taxable, the Court of Tax Appeals (CTA) ruled recently. The court en banc affirmed an earlier decision of the court’s First Division, which had canceled a P6.15-million assessment for 1998 against Deutsche Bank AG. The Bureau of Internal Revenue (BIR) had imposed the tax on income derived from foreign currency transactions with all Philippine residents, both individual and corporate, and not just with local banks. The assessment was based on Revenue Regulations No. 10-98, which imposes a 10% final withholding tax on income derived by an FCDU or an offshore banking unit (OBU) from foreign currency transactions with residents. But the tax court said the regulation goes beyond the coverage of Section 28 of the National Internal Revenue Code of 1997. The law imposes a 10% final income tax on income derived from foreign currency transactions with local banks, including branches of foreign banks. Associate Justice Juanito C. Castañeda said the portion of Revenue Regulations 10-98 that imposes the 10% final withholding tax on income derived by FCDUs and OBUs from foreign currency transactions with Philippine residents in general is void and has no binding effect. Such administrative issuances, he added, must remain consistent with the law they seek to implement. The BIR formally demanded payment of deficiency taxes totaling P39.7 million from Deutsche Bank on Jan. 18, 2002. This was modified after the bank disputed the assessment. On Oct. 18, 2002, another letter was sent to the bank demanding payment of only P6.15 million. Still, the bank contested this and filed a petition for review with the tax court the following month. The court’s First Division favored the bank on May 17, 2005 by canceling the assessment. The BIR’s motion for reconsideration was denied three months later. In filing the petition with the court en banc, the BIR said Section 28 of the Tax Code only enumerates transactions with local commercial banks and local branches of foreign banks because FCDUs and OBUs are only authorized to conduct foreign currency transactions with these entities. "If a taxpayer conducts a business beyond what is authorized of him, other income derived there-from is similarly taxable," the Internal Revenue officials argued earlier. But the full court, ruling in favor of Deutsche Bank, said: "A statute will not be construed as imposing a tax unless it does so clearly, expressly and unambiguously. The provisions of a taxing act are not to be extended by implication."