RMC No. 31-2009: Circularizes the memorandum of the Commissioner disallowing BSP claimed interest expense for taxable year 2005

Key points

1. BSP’s position. BSP argued it is not liable for the deficiency income tax assessment of P 1,224,675,111.92 for 2005. It said it is not engaged in interest arbitrage and should be able to claim its full interest expense without reduction by interest income subjected to final tax.
2. Basis for the disallowance. Where a taxpayer has interest expense on indebtedness connected with its trade and also earns interest income subjected to final withholding tax, the interest expense is subject to the limitation set by law. The law does not require tax arbitrage for the limitation to apply.
3. Implementing rules. The limitation applies whether or not a tax arbitrage scheme was entered into, regardless of the dates of the loan and the investment, and irrespective of the currency of the loan or investment, so long as interest expense and final-taxed interest income both arise in the taxable year.
4. Ruling that prevails. BIR Ruling No. 006-2000 issued on January 5, 2000 by former Commissioner Beethoven L. Rualo prevails over rulings not in line with it, provided all other requirements for deductibility of interest expense are complied with.

Who is affected

• Bangko Sentral ng Pilipinas

Deadlines and effectivity

• Issued June 16, 2009
• Covers taxable year 2005