Tax treatment of interest income on financial instruments

The BIR issued the following clarifications on the tax treatment of interest income on financial instruments under Revenue Regulations No. (RR) 14-2012.

1. On the tax treatment of interest income from government securities (Section 2, RR 14-2012)

Mere issuance of government debt instruments and securities shall be deemed falling within the coverage of “deposit substitutes,” regardless of the number of lenders at the time of origination. Such interest income derived from government debt instruments or securities is subject to 20% final withholding tax (FWT).

2. On the imposition of 20% FWT on government securities (Section 2, RR 14-2012)

In case of zero-coupon government debt instruments and securities, the FWT is payable upon original issuance; in case of interest-bearing government debt instruments and securities, the FWT shall be payable upon payment of the interest.

3. On the imposition of 20% CWT on interest income from other debt instruments not classified as “deposit substitutes” (Section 7, RR 14-2012)

The 20% creditable withholding tax (CWT) under the subsection (Y) of Sec. 2.57.2 of RR 2-98, as amended by RR 14-2012, shall be imposed on interest payment made beginning November 23, 2012, irrespective of when the instruments or securities were issued. The 20% CWT shall cover all interest income from current outstanding instruments, securities, or accounts as of November 23, 2012.

4. On the tax treatment of interest income from long term deposits or investment certificates (Section 3, RR 14-2012)

Interest income derived by domestic and resident foreign corporations from long-term deposits not issued by banks or investment certificates that are not considered deposit substitutes shall be subject to 20% CWT, and reported as part of taxable income of the domestic and resident foreign corporations subject to 30% regular corporate income tax.

5. On DST on assignments or re-assignments of debt instruments (Section 8, RR 14-2012)

The documentary stamp tax (DST) on assignment or re-assignment of debt instruments pursuant to Section 198 shall apply only to instances when the assignment or re-assignment of the debt instrument entails changing the maturity date or remaining period of coverage from the original instrument or carries with it a renewal or issuance of new instruments in the name of the transferee to replace the old ones.

Otherwise, the assignment or re-assignment without any change in maturity date shall be exempt from DST as provided under Section 199(f) or (g) of the Tax Code.

(Revenue Memorandum Circular No. 77-2012, November 23, 2012)

Tax Brief – December 2012

Punongbayan and Araullo