RR No. 14-2012: Prescribes the proper tax treatment of interest income earnings on financial instruments and other related transactions

Key points

1. Government debt instruments. Government debt instruments and securities, including Treasury bonds, bills and notes, are deposit substitutes regardless of the number of lenders if they are to be traded or exchanged in the secondary market. Interest is subject to Final Withholding Tax (FWT) of 20%, 25% or 30% depending on the recipient under the cited NIRC sections, and original issuance is subject to Documentary Stamp Tax under Section 179.
2. Long-term deposits. Interest on long-term deposits or investment certificates of individuals is exempt if conditions are met, including issuance by banks only, a maturity of not less than 5 years, and denominations of Ten thousand pesos (P10,000.00) and other denominations as BSP may prescribe. Pre-termination before the 5th year is subject to graduated FWT rates of 5%, 12% or 20% by remaining maturity, and other cases are subject to 20%, 25% or 30% depending on the recipient.
3. Currency bank deposits and deposit substitutes. FWT is 20% for citizens, resident aliens, non-resident aliens engaged in trade or business, domestic corporations and resident foreign corporations. It is 25% for non-resident aliens not engaged in trade or business and 30% for non-resident foreign corporations, except 20% on foreign loans contracted on or after August 1, 1986.
4. Foreign currency deposit units and offshore banking units. Under the Expanded Foreign Currency Deposit System, FWT is 7.5% for citizens, resident aliens, domestic corporations and resident foreign corporations. Income of non-residents from transactions with such banks is exempt, and interest on foreign currency loans to certain residents is taxed at 10%. Offshore banking units have similar rules.
5. Other debt instruments. Unless otherwise provided, interest on other debt instruments outside deposit substitutes and these Regulations is subject to Creditable Withholding Tax at 20%, which the income payor withholds and remits to the BIR.

Who is affected

• Recipients of interest income from government securities, long-term deposits, currency deposits and deposit substitutes
• Depository banks under the Expanded Foreign Currency Deposit System
• Offshore banking units

Deadlines and effectivity

• Long-term deposit maturity: not less than 5 years
• Pre-termination before the 5th year: graduated FWT of 5%, 12% or 20%
• Foreign loans contracted on or after August 1, 1986: FWT of 20%