Question & AnswerQ&A (BATAS PAMBANSA BLG. 643)
The primary purpose is to prescribe the procedures for filing tax returns for income derived by Foreign Currency Deposit Units (FCDUs) from foreign currency and other transactions, and the manner of reporting their income for income tax purposes under Sections 27(D)(3) and 28(A)(7)(b) of the Tax Code.
A bank with an FCDU is considered to have dual tax status because the income of its RBU is taxed under normal income tax rates or Minimum Corporate Income Tax (MCIT), while income derived from FCDU under foreign currency transactions is subject to a final tax of 10%, with other FCDU income possibly subject to regular corporate income tax rates.
Banks with FCDUs must file two separate income tax returns: one for the RBU income using the existing TIN and another for the FCDU income using the additional TIN issued, with the FCDU return reflecting income taxed at 10% and other income at normal rates.
BIR Form 1702Q is used for quarterly returns covering taxable income derived by the FCDU, and BIR Form 1702 is used for the final consolidated/annual return covering total taxable income of the FCDU.
Quarterly returns must be filed within 60 days after the end of each quarter, and the final annual return must be filed on or before the 15th day of the fourth month following the close of the taxable year.
Interest income from foreign currency loans to residents is subject to a 10% final withholding tax deducted and remitted by the borrower as withholding agent. This income must still be reported in the FCDU's income tax return for information purposes along with relevant withholding tax documents and schedules.
The FCDU must maintain separate and independent records and books of accounts from the RBU, keep these at the principal place of business, and ensure they are readily available for inspection by authorized BIR personnel.
The ITS system, following the 'one TIN, one income tax return' policy, caused suspension of FCDU tax returns or triggered system-generated assessments due to the difference in tax treatments and rates, which the system could not distinguish.