By: Tax and Accounting Center Philippines
Interest expense is what the taxpayer pays for borrowed funds in the conduct of trade or practice of profession. It refers 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.
Here are the requirements for deductibility of interest expense from taxable income laid down in Revenue Regulations No. 13-2000:
Limitation of interest expense in the Philippines
Interest expense has been a common tax savings device in the past using the “tax arbitrage” scheme. Under this tax arbitrage in the Philippines, taxpayer would secure a loan simply to generate interest expense thereby reducing the taxable income and enjoying a tax benefit thereto. The funds loaned will then be deposited with the bank to yield interest income that is subject to a final withholding tax (e.g. 20%) less than the normal income tax rate (e.g. 30% starting 2009). In effect, the taxpayer enjoys a double tax benefit – tax benefit on deduction of interest expense, and tax benefit on lower tax rate for income. To neutralize the impact of such scheme, deductible interest expense in the Philippines is reduced by 33% (starting 2009) of such interest income subjected to final withholding tax. Nevertheless, interest expense on unpaid taxes is not covered by this limitation on interest expenses in the Philippines.
Withholding tax on interest expense in the Philippines
Interest expense in the Philippines is subject to withholding tax at varied rates as follows:
Please note that failure to withhold the corresponding rate would disqualify your claim for interest expense.
Special rules on interest expense in the Philippines
You must also be aware of the special rules applicable to specific interest expenses in the Philippines. Example is an interest expense in the purchase of a property may be included as part of the cost of the property to be depreciated instead of being claimed as interest expense in full. Another is interest expense incurred to finance petroleum operations in the Philippines is generally not deductible under “The Oil Exploration and Development Act of 1972” or Presidential Decree No. 8, as amended by Presidential Decree No. 87.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.
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