RR No. 17-2020: Implements the Tax Neutrality provision of Republic Act No. 11439 (An Act Providing for the Regulation and Organization of Islamic Banks)

Summary

RR No. 17-2020 implements the Tax Neutrality provision of RA No. 11439 (An Act Providing for the Regulation and Organization of Islamic Banks).

Key points

1. Coverage. The Regulations cover transactions of Islamic banks, domestic or foreign, and Islamic Banking Units of conventional banks. These are authorized to do business under Shari’ah principles under Bangko Sentral ng Pilipinas (BSP) guidelines.
2. Substance over form. Tax treatment follows the economic substance of an Islamic banking arrangement, not its form. Where it is economically equivalent to a conventional bank product, both are taxed the same.
3. Interest, disposals and extra instruments. References to interest apply to gains, profits and expenses in Islamic banking arrangements. References to a disposal or lease of an asset do not apply to those carried out under Islamic banking arrangements as defined by the BSP, as long as the tax effect approximates the conventional transaction. An additional instrument needed only for Shari’ah compliance is excluded for tax purposes.
4. Arrangements left to a separate circular. A separate Revenue Memorandum Circular will cover Murabahah, Tawarruq, Salam, Ijarah, Mudarabah Partnership, Wakalah Investment, Istisna, Musharaka, Sukuk, and other transactions economically equivalent to conventional finance.
5. Reporting, segregation and registration. Islamic banks prepare financial statements under the Philippine Financial Reporting Standards (PFRS), taking into account differences from conventional banking. Conventional banks with Islamic banking arrangements keep a system that segregates the Islamic unit’s transactions. Authorized Islamic banks register with the BIR like conventional banks.
6. Receipts. Islamic banks, including conventional banks with Islamic banking windows, issue receipts on profits, gains and fees from banking operations.

Who is affected

• Domestic and foreign Islamic banks
• Islamic Banking Units of conventional banks

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