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General, Tax Updates, Taxation

RR No. 14-2012 Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related Transactions

In doing business, individuals and companies usually earn interest income.  These interests income may be derived from investments and deposits that are often called in accounting as financial instruments.  These interests might be derived from deposits in banks and other financial institutions, investments in corporate bonds, investment in government securities (such us treasury bills, treasury bonds, treasury notes), loans receivables, and other sources.

The question is, what is the tax treatment for these interest income.  Are they subject to final withholding tax? creditable withholding tax? regular corporate income tax? or tax exempt?  What is the appropriate tax rate? 20%, 25% 30%, 35%, etc?… Many individuals and companies have dilemma on how to compute for the tax due and how are these be paid.

Good thing, Revenue Regulations (RR) No. 14-2012 Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related Transactions was issued by the Bureau of Internal Revenue which summarizes the tax treatment for all kinds of interest income an individual or a company may earn.  Now we are guided with the tax treatment in one RR, it reduces the confusions we had before on how to really treat the interest income we earn from various sources.  To view the RR No. 14-2012 Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related TransactionsClick Here!

This applies to the Philippine setting only. If you are governed by laws outside the Philippines, you must have accessed this page by mistake.  =)

Following are the major discussions in the RR No. 14-2012:

  1. Tax treatment of interest income derived from government debt instruments and securities
  2. Tax treatment of interest income derived from long-term deposits or investment certificates
  3. Tax treatment of interest income derived from currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements
  4. Tax treatment of interest income derived from a depository bank under the expanded foreign currency deposit system
  5. Tax treatment of interest income derived from offshore banking units
  6. Tax treatment of interest income derived from all other instruments

RR No. 14-2012 is effective 15 days following the complete publication in a newspaper of general circulation

While tax treatment was clarified by RR No. 14-2012, the accounting treatment for these interest income may be a bit complicated.  The recording of tax for accrued interest may not be as straight forward as we think.  Interest income subjected to final withholding tax are also considered  reconciling items in the regular corporate income tax computation and may make our computation a little bit complicated than we expected.  We should be mindful that there are also various disclosure requirements in the financial statements on taxes which are affected by the tax treatment of interest income.  To ensure that you have appropriately accounted for all of these matters, we strongly suggest you to consult your professional accountants.

On November 22, 2012, the BIR issued Revenue Memorandum Circular (RMC) 77-2012, to clarify certain provision of the RR No. 14-2012.  To download a copy of the RR No. 14-2012 and RMC 77-2012 click links below:

A. Interest income RECEIVED by banks
Payors belongs to the Top 20,000 Corporations
Creditable Withholding Tax (CWT) – 2%

Payors does not belong to the Top 20,000 Corporations
Creditable Withholding Tax (CWT) – 20%

B. Interest income PAID by banks
Banks designated as Top 20,000 Corporations
Creditable Withholding Tax (CWT) – 2%

Banks does not belong to Top 20,000 Corporations
Creditable Withholding Tax (CWT) – 20%

If you have questions, you can always leave them in this site and I will try my best to answer them.

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About leecpa

Orlando Calundan is a Certified Public Accountant. He has exposures in audit of financial statements of entities in various industries such as real estate, food (quick service restaurants), manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements. http://ocalundan.info

Discussion

22 thoughts on “RR No. 14-2012 Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related Transactions

  1. hi! may i know if this rule applicable to the interest of loan in a bank?

    Posted by dez | November 29, 2012, 3:09 am
    • Hi Dez! As far as interest income is concern, I think interest on bank loans are covered by this RR. It will fall under Section 7 since it does not fall under all other category. To be safe, you can check with the RDO.

      Posted by leecpa | December 1, 2012, 10:25 am
      • Hi. Just to give a background, prior to issuance of RR 14-2012, it is only interest payments for loans to banks in foreign currency that is subject to withholding tax. The interest on loans in Philippine currency with banks is not covered by withholding tax. But under this new RR, it now regulates all interest income payments on all debt instruments to be subject to withholding tax. Thus, the debtor or interest income payor is now required to withhold tax effective November 23, 2012.

        Posted by -cpa184- | December 14, 2012, 11:16 am
      • Thank you for additional info….

        Posted by leecpa | December 14, 2012, 11:32 am
  2. Are interest on loan to banks subject to CWT of 20%

    Posted by lala | November 29, 2012, 8:50 am
    • Hi Lala, I’m not really a tax expert but reading through the provisions of the RR, as replied to Dez, yes, I think interest on bank loans by domestic corporations are subject to CWT of 20%. Thus, if you have an interest expense payable to a bank, you are required to withhold 20% of it, remit to the BIR and issue withholding tax certificate. Just to be safe, you can always ask your RDO.

      Posted by leecpa | December 1, 2012, 10:29 am
  3. We have a loan from a lending corporation, are we required to withhold 20% from the interest expense we’re going to pay?

    Posted by sally | December 10, 2012, 1:59 am
    • Yes.. it will fall under section 7 of the RR.

      Posted by leecpa | December 10, 2012, 3:04 am
      • you mean an individual borrower from a lending company is required to withhold 20% from the interest that he has to pay the company and issue a withholding tax certificate for the lending company’s use in filing its annual income tax return? is it not the other way around. if a lending company borrow funds from not more than 19 individual lenders the company is required to withhold 20% CWT from the interest that it will pay the individual lender. pls advise.

        Posted by Flor Santiago | August 25, 2013, 10:58 am
      • I think individual taxpayers are not required to withhold. The RMC says top 20,000 corporations. Also, if it is between a corporation and a lendding company, 2% applies for the interest from loan, not 20%, provided further that the company is one of the top 20,000 corporation. Otherwise, I dont think there is a need to withhold.

        In your second scenario, the tax rate is 2%, provided that the lending company that borrowed belongs to top 20,000 corporation.

        Posted by leecpa | August 25, 2013, 2:30 pm
  4. Hi, just want to ask if a corp is not among top 20,000 is it still required to withhold 20% CWT on interest on bank loan?

    Posted by marika | January 8, 2013, 9:03 am
    • Yes… The top 20,000 corporation requirement is applicable to 2% withholding tax on income payments for services and 2% withholding tax on income payments for goods and not on interest income.

      Posted by leecpa | January 8, 2013, 10:15 am
  5. Hi All.. I updated the post to include Revenue Memorandum Circular 84-2012 which contain very important update on the withholding tax.. Please see updated post above..

    Posted by leecpa | February 3, 2013, 7:47 pm
  6. IS the GTR from interest paid to a banks included in the computation of 2 % withholding tax?

    Posted by Aradan H. Amdad | April 17, 2013, 1:03 am
  7. Sir with these changes in tax regulations, which are subject to various interpretations, may i ask if the following statements are correct?

    20% FWT is applied on:
    1. interest payments covered under Section 24(B), 27(D)(1), and 28(A)(7) of the Tax Code…from “DEPOSIT SUBSTITUTES” and from trust funds and similar arrangements.
    2. interests earned from trust funds as provided under Section 24(B), 27(D)(1), and 28(A)(7) of the Tax Code…
    *a debt instrument is considered as a DEPOSIT SUBSTITUTE if any of the following is present:
    a. number of original lenders is 20 or more;
    b. number of original lenders is 19 or less but one or some of such original lenders subsequently securitize, assign or participate out the debt instrument;
    c. original lender securitizes, assigns or participates out the debt instrument.
    ___________________________________________________________________

    20% CWT shall be due on the interest payments arising from a debt instrument that does not fall under the characteristics mentioned above but the debt is securitized, assigned or participated out. (corporate note issuance involved not more than 19 and not securitized)
    ______________________________________________________________________

    2% CWT shall be due if interest arising form a debt instrument does not fall under any of the above characteristics and that:
    1. payor belongs to top 20,000 corporation and
    2. payee is a bank or non-bank financial intermediary.
    _________________________________________________________________________

    any other interest not falling under any of the above shall not be subject to withholding.
    Ex:1. transactions not involving top 20,0000 corporation
    2. lender is not a bank or a non-bank financial intermediary

    Posted by chit ruiz | July 1, 2013, 2:52 am
    • CORRECTION:
      20% CWT shall be due on the interest payments arising from a debt instrument that does not fall under the characteristics mentioned above but the debt is securitized, assigned or participated out. (corporate note issuance involved not more than 19 and securitized)

      Posted by chit ruiz | July 1, 2013, 3:30 am
  8. Sir, what if the corporation belonging to a top 20000 defaulted in paying their loan but recognized their liability (DR interest expense CR Loan Payable) are they still required to withheld 2% and remit to BIR? or the withholding of tax will be done upon payment of loan and its corresponding interest?

    Posted by Mike | November 5, 2013, 8:55 am
  9. What if the loan is between a corporation and a Dealer corp. (not a bank or financial institution), the corp borrowed a certain amount and must pay the interest every month to the Dealer Corp., is the Dealer Corp required to withhold from the interest payments it received? Thank you.

    Posted by Jae | December 12, 2013, 4:57 am
  10. i am self employed and mortgaged a real property to secure a bank loan. should i withhold from my monthly interest payment to the bank so i can claim interest expense in my ITR?

    Posted by cynthia | March 8, 2014, 5:13 pm
  11. Hi! How about Income from Bonds issued abroad or issued by non resident corp or securities listed abroad?

    Posted by elgin | April 15, 2014, 1:40 am

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