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Philippines Issues Definitive Tax Rules On Interest Income

by Mary Swire,, Hong Kong

16 November 2012

In Revenue Regulations No. 14-2012 (RR14), the Philippines Bureau of Internal Revenue (BIR) has clarified the withholding tax treatment of interest income received from financial instruments, which harks back to last year’s controversy on the redemption of the government's Poverty Eradication and Alleviation Certificates (PEACe) bonds.

In October last year, on their maturity, the BIR imposed a 20% withholding tax on the redemption proceeds of the PEACe bonds, which were issued for poverty alleviation and development purposes in 2001 as being “tax free”, following a BIR ruling. However, a later BIR ruling stipulated that final withholding tax (FWT) amounting to some PHP5bn (USD121.5 m) would still be due.

The BIR was said to have made its later ruling based on its rulings in 2004 and 2005 that confirmed that interest income on government debt and securities, or "deposit substitutes", are subject to the tax, and this is confirmed by RR14.

RR14 states that deposit substitutes are “an alternative form of obtaining funds from the public other than deposits, through the issuance, endorsement or acceptance of debt instruments... for the purpose of relending or purchasing of receivables and other obligations.”

“Public” is defined as borrowing from 20 or more individual or corporate lenders at any one time, while government debt instruments, such as Treasury bonds, bills and notes, “shall be considered as deposit substitutes irrespective of the number of lenders at the time of origination if such debt instruments and securities are to be traded or exchanged in the secondary market,” as were the PEACe bonds.

The regulations confirm that interest income from those financial instruments shall be subject to 20% FWT if earned by an individual resident taxpayer, a non-resident individual or company engaged in a business in the Philippines, and domestic companies; 25% if earned by a non-resident individual not engaged in a business in the Philippines; and 30% if earned by a non-resident foreign company.

RR 14 also deals with the tax treatment of interest earned from other financial instruments, such as long-term time deposits or investment certificates issued by banks (and not by any other non-bank financial intermediary).

Those deposits, which have a maturity of not less than five years, will not be subject to FWT, provided they are not terminated early and the depositor or investor is an individual citizen (resident or non-resident). If deposits are terminated before the end of five years, interest earnings will be subject to graduated FWT rates based on the age of the deposit at the following rates: 5% (four years to less than five years); 12% (three years to less than four years); and 20% (less than three years).

In addition, interest income from currency bank deposits, trust funds and similar arrangements is also subject to FWT, if earned within the Philippines. However, 50% of the interest earnings from foreign currency deposits of non-residents with dependants resident in the Philippines, such as seamen or overseas Filipino workers, are exempt from tax. The remainder is subject to a 7.5% FWT.

TAGS: tax | investment | business | interest | Philippines | withholding tax | currency | regulation

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