Income Taxation of Interest Income Derived from Deposits and Yield from Deposit Substitutes

October 12, 1984 REVENUE REGULATIONS NO. 17-84 SUBJECT : Income Taxation of Interest Income Derived from Deposits and Yield from Deposit Substitutes TO : All Internal Revenue Officers and Others Concerned SECTION 1 . Scope . Pursuant to the provisions of Sec. 47 of Presidential Decree No. 1959 and Section 326 in relation to Section 4 of the National Internal Revenue Code, as amended, these regulations are hereby promulgated to govern the manner of taxation of interest income derived from deposit and deposit substitutes as provided for by Presidential Decree No. 1959. SECTION 2 . Definitions of Terms . For the purpose of these regulations, unless the context otherwise indicates, the following definitions of terms are hereby adopted: (a) "Bank" shall mean every banking institution as defined in Section 2 of the G eneral Banking Act, Republic Act No. 337, as amende d. A bank may either be a commercial bank, a thrift bank, a rural bank or a specialized government bank. casia (b) "Non-bank financial intermediary" shall mean every financial intermediary as defined in Section 2-D(c) of the General Banking Act, Republic Act No. 337, as amended, authorized by the Central Bank of the Philippines to perform quasi-banking functions. (c) "Quasi-banking functions" shall mean borrowing funds, for the borrower's own account, through the issuance, endorsement or acceptance of debt instruments of any kind other than deposits, or through the issuance of participations, certificates of assignment, or similar instruments with recourse, trust certificates or of repurchase agreements, from twenty or more lenders at any one time, for purposes of relending or purchasing receivables and other similar obligations: Provided, however , that commercial, industrial and other non-financial companies which borrow funds through any of these means for the limited purpose of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking functions. (d) "Finance companies" shall mean corporations or partnerships other than banks or insurance companies, primarily organized for the purposes of: (1) extending credit facilities to consumers and to industrial, commercial or agricultural enterprises whether by granting direct loans or by discounting or factoring commercial papers or account receivables for profit, or (2) buying and selling contracts, leases, chattel mortgages and other evidence of indebtedness arising out of one or more of the steps in the distributions and sale of commodities. (e) "Corporation" includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), associations or insurance companies but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. (f) "Savings deposit" is a deposit which may be withdrawn by the depositor at any time, subject only to the right of the depository bank to require reasonable prior notice in writing before withdrawal may be made. (g) "Time deposit" is a deposit which has a definite time of maturity and cannot be withdrawn by the depositor until maturity except in cases of authorized pretermination. "Deposit substitutes" shall mean (i) In the case of banks and non-bank financial intermediaries, all alternative forms of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, promissory notes, repurchase agreements, certificates of assignment or participation, and similar instruments with or without recourse as may be authorized by the Central Bank of the Philippines. cd i (ii) In the case of finance companies, other than those specified in (i) above, lending investors, investment houses, trust companies and similar institutions and corporations engaged in commercial, industrial, and other activities, all borrowings to finance its own needs or the needs of its agents thru commercial papers issued as evidences of indebtedness whether registered with the Securities and Exchange Commission of the Philippines, or not, regardless of maturity period and with or without recourse basis. (iii) In the case of other non-financial companies, including the national and local government and its instrumentalities, all borrowings through the issuance of debt instruments denoted as treasury bonds, treasury bills, treasury notes, and similar instruments. In line with the foregoing definitions, the following borrowings shall be considered as deposit substitutes: (a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in quasi-banking functions evidenced by deposit substitutes instruments, except interbank call loans to cover deficiency in reserves against deposit liabilities as evidenced by interbank loan advice or repayment transfer tickets. (b) All borrowings of the national and local government and its instrumentalities including the Central Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificate of indebtedness and similar instruments. (c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies, trust companies, including the trust department of banks and investment houses, evidenced by deposit substitutes instruments. (d) All borrowings of corporations evidenced by commercial papers whether or not registered with the Securities and Exchange Commission, from the Philippine National Bank, Development Bank of the Philippines, Government Service Insurance System and the Social Security System and from all private institutional lenders. (e) All borrowings of thrift banks and rural banks through the credit facilities of the Central Bank of the Philippines, Philippine National Bank, Development Bank of the Philippines, Government Service Insurance System, and the Social Security System, evidenced by deposit substitutes instruments. Nothing in these Regulations shall preclude the Commissioner from treating as a borrowing transaction any scheme or agreement which in substance constitutes a debtor-creditor or investor-financial intermediary transactions, and imposing the tax due on the interest or yield from deposit substitutes derived therefrom. (i) "Interest" with respect to bank deposits, shall mean the amount which a depository bank may pay on savings and time deposits in accordance with rates authorized by the Central Bank of the Philippines. (j) "Yield" shall mean the difference between the amount which the lender/investor loaned/placed and the amount to be received by him upon maturity of the deposit substitutes/debt instruments which shall in no case be lower than the interest rate prevailing at the time of the issuance or renewal of the said debt instruments. (k) "Commercial paper" shall mean evidence of indebtedness regardless of maturity period and with or without recourse basis. (l) "Lending investor" includes all persons who make a practice of lending money for themselves or others at interest. SECTION 3 . Imposition of Tax . The following taxes on income shall be imposed: (a) Financial withholding income tax on (1) Interest on savings and time deposit . In general, the rate of final withholding tax to be imposed on savings and time deposit maintained with the bank shall be fifteen (15%) per cent based on gross interest paid or accrued. (2) Yield on deposit substitutes . In general, the rate of final withholding tax to be imposed on yield on deposit substitutes shall be fifteen (15%) per centum . The withholding tax herein imposed shall not apply to (i) Yield on debt instruments with maturity of not more than five (5) days, issued specifically on interbank call loans to cover deficiency in reserves against deposit liabilities as evidenced by interbank loan advice or repayment transfer tickets. (ii) Interest on borrowings from the World Bank, International Finance Corporation, Asian Development Bank and other similar international financial institutions. SECTION 4 . Manner of Computation of Tax Base . For purposes of Section 3 above, the bases of the following taxes shall be computed in the following manner: (a) Final withholding tax on savings and time deposits . The final withholding tax on savings and time deposits shall be based on the gross interest paid or accrued by banks on all savings and time deposits. (b) Final withholding tax on yield of deposit substitutes . The final withholding tax on yield of deposit substitutes shall be based on the gross interest or yield paid or accrued by banks, non-bank financial intermediaries, finance companies, corporations and government agencies on all of its deposit substitutes or debt instruments issued. SECTION 5 . Manner of Filing Return and Payment of Taxes . The taxes herein deducted and withheld shall be paid upon filing a return, in duplicate, with the Revenue District Officer or the Collection Agent of the city or duly authorized treasurer of the municipality where the withholding agent's principal office is located and where its book of accounts are kept except in cases where the Commissioner of Internal Revenue allows otherwise. The required return shall be filed within twenty-five (25) days after the end of each quarter of any calendar year. SECTION 6 . Nature and Treatment of Taxes Imposed Under These Regulations . All withholding taxes deducted and withheld by the withholding agent in accordance with these regulations shall be held as a special fund in trust for the government until paid to the collecting officer. Such withholding taxes shall be considered as a final tax which shall, in no case, be allowed as a deduction or credit against income or any other taxes. cdt SECTION 7 . Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes . (a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the withholding taxes in accordance with these regulations need not be included in the gross income in computing the depositor's/investor's income tax liability in accordance with the provision of Section 29(b), (c) and (d) of the National Internal Revenue Code, as amended. (b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes of imposing the withholding taxes in accordance with these regulations shall be allowed as interest expense deductible for purposes of computing taxable net income of the payor. (c) If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipt tax is imposed. SECTION 8 . Statement to be attached to the corporate tax return of financial institutions . There shall be attached to the final consolidated corporate return of the authorized agent bank or non-bank financial intermediaries for each taxable year, a statement summarizing the pertinent information required by these regulations with respect to the computation of the aggregate interest paid on savings, time deposits and deposit substitutes and taxes withheld therefrom and paid to the Bureau, during the year (B.I.R. Form No. ______). SECTION 9 . Records to be kept . Every withholding agent required to file a return pursuant to these regulations shall maintain records of all the supporting data used in preparing the returns required to be filed. Such records must be made readily available at its principal place of business. SECTION 10 . Penalties . In addition to civil and criminal penalties for violations of the income tax laws as provided for under Sections 73, 74 and 337 of the National Internal Revenue Code of 1977, as amended, the following administrative penalties incident to delinquency or deficiency prescribed in Sections 51 and 72 of the said Code shall be imposed. These penalties shall be collected at the same time, in the same manner and as part of the tax. (1) Surcharges . In case of any failure to make and file a return within the time prescribed by law, not due to willful neglect, there shall be added to the tax twenty-five (25%) per centum of its amount, except that when a return is voluntarily and without notice from the Commissioner or any other revenue officer filed after such time, and it is shown that the failure to file it was due to a reasonable cause no such addition shall be made to the tax. In case of failure to make and file a return due to willful neglect or in case a fraudulent return is willfully made, there shall be added to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity of fraud, a surcharge of fifty (50%) per centum of the amount of such tax on deficiency tax and shall be collected in the same manner as the tax proper. (2) Interest on deficiency tax . Where a deficiency is determined to exist, there shall be collected as part of the tax, interest or deficiency at the rate of twenty (20%) per centum per annum from the date prescribed for the payment of the tax to the date the deficiency is assessed; Provided , that the maximum amount of interest that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three (3) years. (3) Additions to tax in case of non-payment . (i) Tax shown on the return . Where the amount determined by the withholding agent as the withholding tax is not paid on or before the date prescribed for its payment to the Bureau of Internal Revenue, there shall be collected as part of the tax, interest upon such unpaid amount at the rate of twenty (20%) per centum per annum from the date prescribed for its payment until it is paid: Provided , that the amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three (3) years. acd (ii) Deficiency . Where a deficiency, or any interest assessed in connection therewith, or any addition to the withholding tax provided herein is not paid in full within thirty (30) days from the date of notice and demand from the Commissioner of Internal Revenue, there shall be collected upon the unpaid amount, as part of the tax, interest at the rate of twenty (20%) per centum per annum from the date of notice and demand until it is paid: Provided , That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three (3) years. (iii) Surcharge . If any amount of the withholding tax assessed is not paid in full within thirty (30) days after notice and demand, there shall be collected in addition to the interest prescribed herein and in sub-paragraph (ii) above and as part of the tax a surcharge of ten (10%) per centum of the amount of tax unpaid. SECTION 11 . Repealing Clause . All regulations, rules, orders or portions thereof which are inconsistent with the provisions of these regulations are hereby repealed. SECTION 12 . Effectivity . These regulations shall take effect and apply to: (1) interest and/or yield deposit substitute instruments issued beginning October 15, 1984. aisa dc (2) interest on savings and time deposits earned or accrued beginning October 15, 1984. ALFREDO PIO DE RODA Acting Minister of Finance Recommended by: RUBEN B. ANCHETA Commissioner of Internal Revenue