MANILA, Philippines – The Bureau of Internal Revenue reiterated that interest earnings from long-term deposits or investments are exempted from income tax as long as these have a maturity period of not less than five years.
The deposits or investments covered by this rule are time deposits or investments in the form of savings, common or individual trust funds, deposit substitutes and investment management accounts.
The income tax exemption can only be enjoyed by depositors that are individual citizens or aliens engaged in trade or business in the Philippines.
The long-term deposits or investments must be issued by banks only and not by other entities or individuals. These must also be issued by banks in denominations of P10,000.
Moreover, these deposits should not be terminated before end of the fifth year otherwise they shall be subjected to the graduated withholding tax rates based on the age of the deposit – five percent (four years to less than five years), 12 percent (three years to less than four years) and 20 percent (less than three years).
Except those specifically exempted by law, any other income such as gains from trading, foreign exchange gain shall not be covered by income tax exemption.
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In order for interest income derived from investments in individual trust funds or investment management accounts to be exempt from income tax, the investment must be managed by the bank for the named individual at least five years without interruption.
The rationale behind this is to encourage longer-term investments and to properly implement the income taxation of interest income earnings on financial instruments and similar transactions.
The issuance of this regulation was an offshoot of the controversy about the Poverty Eradication and Alleviation Certificate (Peace) bonds issued in 2011 wherein the BIR imposed a 20-percent withholding tax on transactions involving those debt instruments.
Many financial institutions said the imposition of a 20-percent withholding tax was excessive and bad for business.
The Supreme Court recently issued a ruling directing the BIR to return nearly P5 billion in taxes imposed on the Peace bonds. This was in response to the petition filed by Banco de Oro, Bank of Commerce, China Bank, Metrobank, Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank and Planters Development Bank.
Through their lawyer Francis Lim, the banks said “the decision should set the stage for challenging before the Supreme Court the validity of several tax regulations that either contravene or unduly expand the coverage of tax laws.”
“What some people fail or refuse to realize is that these regulations being anti-business have unduly restricted the tax base which could have contributed to higher tax collection for the government,” Lim added.
