(1)
November 20, 2000
REVENUE REGULATIONS NO. 13-00
SUBJECT : Implementing Section 34(B) of the Tax Code of 1997 on the
Requirements for Deductibility of Interest Expense from the
Gross Income of a Taxpayer
TO : All Internal Revenue Officers and Others Concerned
SECTION 1. Scope. — Pursuant to the provisions of Section 244 of
the Tax Code of 1997, these Regulations are hereby promulgated to implement the
provisions of Section 34(B) of the same Code on the requirements for
deductibility of interest expense from the gross income of a corporation or an
individual engaged in trade, business or in the practice of profession.
SECTION 2. Definition of Terms. — For purposes of these Regulations,
the following words and phrases shall have the following meanings, viz:
(a) Interest — shall refer to the payment for the use or forbearance or
detention of money, regardless of the name it is called or
denominated. It includes the amount paid for the borrower's use of
money during the term of the loan, as well as for his detention of
money after the due date for its repayment. cAaETS
(b) Taxpayer — shall refer to a person, whether natural or juridical,
engaged in trade, business or in the exercise of profession, except
one earning compensation income arising from personal services
rendered under an employer-employee relationship.
SECTION 3. Requisites for Deductibility of Interest Expense. — In
general, subject to certain limitations, the following are the requisites for the
deductibility of interest expense from gross income, viz:
(a) There must be an indebtedness;
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(b) There should be an interest expense paid or incurred upon such
indebtedness;
(c) The indebtedness must be that of the taxpayer;
(d) The indebtedness must be connected with the taxpayer's trade,
business or exercise of profession;
(e) The interest expense must have been paid or incurred during the
taxable year;
(f) The interest must have been stipulated in writing;
(g) The interest must be legally due;
(h) The interest payment arrangement must not be between related
taxpayers as mandated in Sec. 34(B)(2)(b), in relation to Sec.
36(B), both of the Tax Code of 1997 ;
(i) The interest must not be incurred to finance petroleum operations;
and
(j) In case of interest incurred to acquire property used in trade,
business or exercise of profession, the same was not treated as a
capital expenditure.
SECTION 4. Rules on the Deductibility of Interest Expense. —
(a) General Rule. — In general, the amount of interest expense paid or
incurred within a taxable year on indebtedness in connection with
the taxpayer's trade, business or exercise of profession shall be
allowed as a deduction from the taxpayer's gross income.
(b) Limitation. — The amount of interest expense paid or incurred by
a taxpayer in connection with his trade, business or exercise of a
profession from an existing indebtedness shall be reduced by an
amount equal to the following percentages of the interest income
earned which had been subjected to final withholding tax
depending on the year when the interest income was earned, viz:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%).beginning January 1, 2000 and thereafter.
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This limitation shall apply regardless of whether or not a tax
arbitrage scheme was entered into by the taxpayer or regardless of the
date when the interest bearing loan and the date when the investment
was made for as long as, during the taxable year, there is an interest
expense incurred on one side and an interest income earned on the other
side, which interest income had been subjected to final withholding tax.
This rule shall be observed irrespective of the currency the loan was
contracted and/or in whatever currency the investments or deposits were
made. DTAIaH
Illustration: Supposing on January 15, 1998, Company A, who
has a deposit account with BCD Bank, obtained a loan from XYZ
Financing Corporation in connection with the operation of its business.
Assume that Company A's net income for the year 1998 before the
deduction of the interest expense amounted to P1,000,000. For the year
1998, the interest income it derived from the said deposit with BCD
Bank amounted to P180,000 on which a final tax of P36,000 had been
withheld. Its interest expense on the loan obtained from XYZ Financing
Corporation during the same year amounted to P150,000.
Under this illustration, the deductible interest expense, the
taxable income and the income tax due of Company A shall be
computed as follows:
1998
Net income before interest expense P1,000,000
Less: Interest expense P150,000
Less: 41% of interest income from
deposit (41% x P180,000) 73,800
————
Deductible interest expense 76,200
————
Taxable income P923,800
————
Income tax due for taxable year 1998 (34%) P314,092
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(c) Interest on Unpaid Taxes. — Provisions of Sec. 4(b) hereof to the
contrary notwithstanding, interest incurred or paid by the taxpayer
on all unpaid business-related taxes shall be fully deductible from
gross income and shall not be subject to the limitation on
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deduction heretofore mentioned. Thus, such interest expense
incurred or paid shall not be diminished by the percentage of
interest income earned which had been subjected to final
withholding tax.
(d) Other cases where interest expense is not deductible from gross
income. — No interest expense shall be allowed as deduction from
gross income in any of the following cases:
(1) If within the taxable year, an individual taxpayer reporting
income on the cash basis incurs an indebtedness on which
an interest is paid in advance through discount or otherwise:
Provided, That such interest shall be allowed as a deduction
in the year the indebtedness is paid: Provided, further, That
if the indebtedness is payable in periodic amortization, the
amount of interest which corresponds to the amount of the
principal amortized or paid during the year shall be allowed
as deduction in such taxable year.
Illustration: Mr. Cruz, a self-employed individual,
consistently employs the cash-basis accounting method in
keeping his books of accounts. Assuming that on January 1,
1998, he contracted a loan of P1,000,000 from XYZ Bank
for use in his business operations. Terms: Payable in two (2)
years at 15% interest per annum, payable in advance. On
January 1, 1998, he received from the bank the proceeds of
his loan in the sum of P700,000, net of interest paid in
advance in the amount of P300,000.
In general, the interest expense shall be taken for the
taxable year in which "paid or incurred" or "paid or
accrued" depending upon the method of accounting upon
the basis of which the net income is computed, unless in
order to clearly reflect the income, the deduction should be
taken as of a different period. Thus, a self-employed
individual is allowed to deduct from his gross income the
entire amount of interest expense actually paid during the
taxable year. However, if the interest expense is paid in
advance and the accounting method used by the
self-employed individual is the cash-basis accounting
method, such interest expense paid in advance shall only be
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allowed as deduction in the year when he has fully paid his
liability. So that if the said debtor has fully paid his loan as
of the end of the taxable year 1999, his interest expense
paid in advance on January 1, 1998 in the amount of
P300,000 shall only be allowed as deduction from his gross
income in the taxable year 1999.
On the other hand, even if the interest expense is
paid in advance but the indebtedness is payable in periodic
amortization, the amount of interest expense which
corresponds to the amount of the principal amortized or
paid during the respective years 1998 and 1999 shall be
allowed as deduction in such respective taxable years. EATcHD
(2) If both the taxpayer and the person to whom the payment
has been made or is to be made are persons specified under
Sec. 36(B) of the Tax Code of 1997, viz:
(i) Between members of a family. For purposes of this
paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole
or half-blood), spouse, ancestors and lineal
descendants; or
(ii) Between an individual and a corporation more than
fifty percent (50%) in value of the outstanding stock
of which is owned, directly and indirectly, by or for
such individual; or
(iii) Between two corporations more than fifty percent
(50%) in value of the outstanding stock of each of
which is owned, directly or indirectly, by or for the
same individual; or
(iv) Between the grantor and a fiduciary of any trust; or
aCTHEA
(v) Between the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with
respect to each trust; or
(vi) Between a fiduciary of a trust and a beneficiary of
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such trust.
(3) If the indebtedness on which the interest expense is paid is
incurred to finance petroleum exploration in the Philippines.
The non-deductible interest expense herein referred to
pertains to interest or other consideration paid or incurred
by a Service Contractor engaged in the discovery and
production of indigenous petroleum in the Philippines in
respect of the financing of its petroleum operations,
pursuant to Section 23 of P.D. No. 8 , as amended
by P.D. No. 87 , otherwise known as "The Oil
Exploration and Development Act of 1972."
(e) Optional treatment of interest expense on capital expenditure. —
At the option of the taxpayer, interest expense on a capital
expenditure incurred to acquire property used in trade, business or
exercise of a profession may be allowed as a deduction in full in
the year when incurred, the provisions of Sec. 36 (A)(2) and (3)
of the Tax Code of 1997 to the contrary notwithstanding, or
may be treated as a capital expenditure for which the taxpayer may
claim only as a deduction the periodic amortization of such
expenditure.
SECTION 5. Repealing Clause. — The provisions of any revenue
regulations or any revenue issuance or ruling inconsistent with these Regulations are
hereby repealed, amended, or modified accordingly.
SECTION 6. Effectivity Clause. — These Regulations shall take effect
immediately.
(SGD.) JOSE T. PARDO
Secretary
Department of Finance
Recommending Approval:
(SGD.) DAKILA B. FONACIER
Commissioner
Bureau of Internal Revenue
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Endnotes
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RA 8424
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