A 20% creditable withholding tax (CWT) shall apply on interest income from all other debt instruments which do not fall within the coverage of “deposit substitutes” or the enumeration below paid or payable to persons residing in the Philippines . This has been added as a new subsection (Y) under Sec. 2.57.2 of RR 2-98. Pursuant to Sec. 2.57.4, the withholding tax is due when the interest is paid or payable or is accrued or recorded as an expense in the books of the payor.
By its nature, the 20% CWT may apply on all withholding agents paying interest on loans including bank loans, intercompany loans, and borrowings from other domestic corporations.
To be considered a “deposit substitute”, the borrowing must be made from twenty (20) or more individual or corporate lenders at any one time. Mere flotation of a debt instrument is not considered to be a “public” borrowing and is not deemed a “deposit substitute” if there are only nineteen (19) or less individual or corporate lenders at any one time.
Any person holding any interest, whether legal or beneficial, on a debt instrument or holding thereof either by assignment or participation, with or without recourse, shall be considered as lender, and thus, be counted in applying the 19-lender rule.
This RR reiterates and consolidates the regulations on the imposition of the taxes on interest income as follows:
1. Interest income from government debt instruments and securities
2. Interest income from long term doposits or investment certificates
3. Interest income from bank deposits, deposit substitutes, trust funds and similar arrangements
4. Interest income from depository banks under the expanded foreign currency deposit system (EFCDU)
5. Interest income from offshore banking units (OBUs)
Please find attached copy of RR 14-2012 for your reference and guidance.
