Are Non-Resident Foreigners With Philippine Bank Deposits Subject to Withholding Tax?

Introduction

In the globalized financial landscape, non-resident foreigners often maintain bank deposits in the Philippines for various reasons, such as investment, remittance facilitation, or temporary financial needs during visits. A key concern for these individuals and entities is the applicability of withholding tax on interest income derived from such deposits. Philippine tax laws, primarily governed by the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent legislation like the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law (Republic Act No. 11534), impose specific withholding tax obligations on interest earnings. This article comprehensively examines whether non-resident foreigners—defined as non-resident aliens or foreign corporations—are subject to withholding tax on their Philippine bank deposits, distinguishing between peso and foreign currency accounts, and exploring exemptions, rates, mechanisms, and related considerations.

Defining Non-Resident Foreigners in Philippine Tax Law

Under Philippine tax jurisprudence, "non-resident foreigners" refer to two main categories:

Non-Resident Aliens (NRAs): Foreign individuals who are not residents of the Philippines. Residency for aliens is determined by the intention to stay permanently or for an indefinite period. Aliens are classified as:
- Non-Resident Aliens Engaged in Trade or Business (NRAETB): Those who stay in the Philippines for more than 180 days in a calendar year or conduct business activities.
- Non-Resident Aliens Not Engaged in Trade or Business (NRANETB): Those with temporary stays (e.g., tourists, short-term visitors) and no business engagement.
Non-Resident Foreign Corporations (NRFCs): Foreign corporations not engaged in trade or business in the Philippines, meaning they do not have a branch, office, or continuous activities generating income within the country.

These classifications are crucial because tax treatment varies based on residency and engagement status. Philippine citizens, even if abroad (e.g., Overseas Filipino Workers or OFWs), are generally considered resident citizens and fall outside this definition, though their interest income may have separate exemptions.

Bank deposits for non-resident foreigners are permitted under Bangko Sentral ng Pilipinas (BSP) regulations, subject to know-your-customer (KYC) requirements, anti-money laundering rules, and documentation like passports or incorporation papers. Common deposit types include savings accounts, time deposits, and checking accounts in pesos or foreign currencies.

Types of Philippine Bank Deposits Relevant to Non-Residents

Philippine banks offer deposits in two primary currencies, each with distinct tax implications:

Peso Deposits: These include savings, time, and demand deposits denominated in Philippine pesos (PHP). They are governed by general banking laws and are subject to standard income tax rules under the NIRC.
Foreign Currency Deposits: Held under the Foreign Currency Deposit Unit (FCDU) system, established by Republic Act No. 6426 (Foreign Currency Deposit Act of the Philippines, as amended). These deposits can be in currencies like USD, EUR, or JPY and are designed to attract foreign capital. FCDUs operate separately from peso operations and enjoy special privileges, including tax exemptions.

Interest on these deposits constitutes passive income, which is typically subject to final withholding tax (FWT) at source, meaning the bank deducts the tax before crediting the interest to the depositor's account.

Legal Framework Governing Taxation of Bank Deposit Interest

The taxation of interest from bank deposits for non-resident foreigners is rooted in several key laws and regulations:

National Internal Revenue Code (NIRC), Section 24-28: Outlines income tax on individuals and corporations, including final taxes on passive income like interest.
TRAIN Law (RA 10963): Amended the NIRC to unify and adjust withholding tax rates on interest income, effective January 1, 2018.
CREATE Law (RA 11534): Further amended corporate tax rates, reducing the income tax for NRFCs from 30% to 25% effective July 1, 2020, with retroactive application in some cases.
Foreign Currency Deposit Act (RA 6426): Provides tax exemptions specifically for FCDU interest income earned by non-residents.
BSP Circulars: Such as Circular No. 1111 (2021) on deposit operations and Manual of Regulations for Banks (MORB), which mandate banks to withhold taxes and report to the Bureau of Internal Revenue (BIR).
Tax Treaties: The Philippines has double taxation agreements (DTAs) with over 40 countries, which may override domestic rates under the NIRC's Section 32(B)(7).

The principle of sourcing rules applies: Interest income is Philippine-sourced if derived from deposits in Philippine banks, making it taxable unless exempted.

Tax Treatment for Peso Bank Deposits

For peso deposits, non-resident foreigners are generally subject to withholding tax on interest income, as it is considered Philippine-sourced passive income. The specifics depend on the taxpayer's classification:

Non-Resident Aliens Not Engaged in Trade or Business (NRANETB):
- Interest income is subject to a 25% final withholding tax under NIRC Section 25(B).
- This rate applies to gross interest, with no deductions allowed.
- Pre-TRAIN, the rate was also 25%, but TRAIN unified rates for residents without altering this category.
Non-Resident Aliens Engaged in Trade or Business (NRAETB):
- Treated similarly to resident aliens, subject to 15% final withholding tax on interest from peso deposits under NIRC Section 25(A)(2), as amended by TRAIN.
- This lower rate reflects their "engaged" status, aligning with resident taxation.
Non-Resident Foreign Corporations (NRFCs):
- Subject to 25% tax on gross income, including interest, under NIRC Section 28(B)(1), as reduced by CREATE from the previous 30%.
- Withholding is final, meaning no further tax filing is required.

Banks act as withholding agents under Revenue Regulations (RR) No. 2-98, as amended, deducting the tax quarterly and remitting it to the BIR via BIR Form 1601-F. Depositors receive a Certificate of Tax Withheld (BIR Form 2307) for reference, though non-residents typically do not file Philippine tax returns unless they have other income.

Exemptions for peso deposits are rare for non-residents but may apply if the deposit is part of a government-approved investment or under specific laws like the Omnibus Investments Code (Executive Order No. 226), though these are not common for simple bank deposits.

Tax Treatment for Foreign Currency Deposits (FCDUs)

The tax regime for FCDU deposits is more favorable, particularly for non-residents, due to explicit exemptions:

Exemption for Non-Residents: Under Section 6 of RA 6426, "any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded foreign currency deposit system shall be exempt from income tax."
- This covers interest on FCDU deposits, making it entirely tax-free for NRANETB, NRAETB, and NRFCs.
- The exemption aims to encourage foreign inflows and maintain banking secrecy under Section 8 of the same Act.
- However, this exemption does not extend to interest on foreign currency loans granted by FCDUs to Philippine residents, which are subject to 15% final tax.
Distinction from Peso Deposits: Unlike peso deposits, FCDU interest for non-residents is not subject to any withholding tax, regardless of the amount or duration.
Yield on Deposits: Banks may offer higher yields on FCDUs due to this tax advantage, but depositors must comply with BSP limits on withdrawals and conversions.

If a non-resident converts FCDU funds to pesos or engages in other transactions, any resulting income (e.g., foreign exchange gains) may be taxable separately under NIRC Section 32(A).

Withholding Tax Mechanism and Compliance

The withholding process is automated by banks:

Rate Application: Banks determine the depositor's status via account opening documents (e.g., FATCA/CRS forms for foreign tax compliance).
Quarterly Remittance: Taxes are withheld upon interest crediting and remitted within 25 days after the quarter's end.
Reporting: Banks file annual information returns (BIR Form 1604-F) detailing withheld taxes.
For Non-Residents: No individual tax return is required if the interest is the only Philippine income and fully withheld. However, if other income exists, a return may be needed under NIRC Section 51.

Non-compliance by banks can lead to penalties under NIRC Section 251 (up to PHP 20,000 fine) or criminal charges for willful failure.

Impact of Tax Treaties

Philippine tax treaties can reduce or eliminate withholding tax on interest for non-resident foreigners from treaty countries:

General Provision: Most DTAs limit taxation of interest to 10-15% (e.g., US-Philippines DTA: 15%; Japan-Philippines: 10%).
Claim Process: Non-residents must apply for tax treaty relief via BIR Ruling or Revenue Memorandum Order No. 8-2017, submitting documents like certificate of residence.
Beneficial Owner Requirement: The depositor must be the beneficial owner, not a conduit.
Examples:
- A US non-resident with peso deposits may have tax reduced to 15%.
- For FCDUs, treaties are irrelevant since income is already exempt.

Without treaty relief, domestic rates apply, and overwithholding can be refunded via claims under NIRC Section 204.

Penalties and Risks for Non-Compliance

Non-resident foreigners face indirect risks if banks fail to withhold properly, but primary liability lies with the withholding agent. However:

Surcharges and Interest: Underwithholding incurs 25% surcharge and 12% annual interest (NIRC Section 249).
Criminal Penalties: Willful evasion can lead to fines (PHP 5,000-50,000) or imprisonment (NIRC Section 255).
Audit Exposure: BIR may audit foreign depositors if flagged under exchange of information agreements (e.g., via OECD Common Reporting Standard).
Capital Gains: Separate from interest, any gains from deposit-related investments (e.g., bonds) may incur additional taxes.

Conclusion

Non-resident foreigners with Philippine bank deposits are subject to withholding tax on interest from peso deposits—at rates of 15% for NRAETB, 25% for NRANETB and NRFCs—unless reduced by tax treaties. In contrast, interest from foreign currency deposits under the FCDU system is entirely exempt, providing a tax-efficient option for non-residents. This framework balances revenue collection with incentives for foreign capital. Depositors should consult tax professionals or the BIR for personalized advice, ensuring compliance with evolving regulations and documentation requirements to avoid unintended liabilities. Understanding these nuances is essential for effective financial planning in the Philippine context.