RMC No. 19-2024: Clarifying the tax treatment of interest expense paid or incurred on indebtedness in connection with the taxpayer’s profession, trade or business and other related matters

Summary

RMC No. 19-2024 clarifies the tax treatment of interest expense paid or incurred on indebtedness in connection with the taxpayer’s profession, trade or business, comparing accounting treatment with current tax treatment.

Key points

1. Requisites for deduction. Under Section 34(B)(2) of the NIRC, RR No. 13-2000 and Section 7(B) of RR No. 5-2021, the debt must be the taxpayer’s and the interest stipulated in writing and legally due. It must not be between related taxpayers, not incurred to finance petroleum operations, and not treated as capital expenditure.
2. Reduction for final-taxed interest. Interest expense is reduced by twenty percent (20%) of interest income subjected to Final Tax, and the taxpayer must have withheld the appropriate tax. For corporations under the regular 20% Corporate Income Tax rate, the reduction is zero percent (0%).
3. Cash basis interest paid in advance. Interest is deductible in the year the indebtedness is paid. For periodic amortizations, the interest matching the principal amortized or paid during the year is deductible in that year.
4. Related parties. Interest expense on indebtedness between related parties is not deductible under Section 34(B)(2)(b).
5. Capitalizing interest. Only interest directly attributable to acquiring property used in trade, business or profession may be capitalized for tax, not on assets for sale such as inventories. The option is irrevocable per asset, and only depreciation or amortization of the capitalized interest is then deductible.

Who is affected

• Taxpayers with interest-bearing indebtedness in trade, business or profession

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.