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

Posted on November 24, 2012 by | 15 Comments

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 Transactions, Click 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.

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

  1. Jayce · Edit

    Hi. What about the interest income earned by the lessee as a result of rediscounting an advanced rental…should the lessor withhold tax,? At what rate if any…thank you….

    Reply
    1. leecpa · Edit

      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.

      Reply
    1. leecpa · Edit

      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.

      Reply
    1. leecpa · Edit

      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.

      Reply
      1. -cpa184- · Edit

        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.

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