November 22, 2012

REVENUE MEMORANDUM CIRCULAR NO. 077-12

SUBJECT : Clarifying Certain Provisions of Revenue Regulations No. 14-2012

on the Proper Tax Treatment of Interest Income Earnings on
Financial Instruments and Other Related Transactions

TO : All Internal Revenue Officers and Other Concerned

For the information and guidance of all concerned, this Circular is being issued to
clarify certain provisions of Revenue Regulations (RR) No. 14-2012 on the Proper Tax
Treatment of Interest Income Earnings on Financial Instruments and Other Related
Transactions.
Q1. What is the tax treatment of interest income derived from government debt
instruments and securities?
A1. For government debt instruments and securities, their mere issuance is deemed as
falling within the coverage of "deposit substitutes" irrespective of the number of
lenders at the time of origination. (Section 2[4] of RR 14-2012)
BIR Ruling No. 007-04 dated July 16, 2004 issued to the Bureau of Treasury explains:
". . . since the object of the issuance is to obtain the required government
funding, the issuance and subsequent distribution (exchange and trading)
of Government debt instruments and securities in the secondary market to
other market participants, speci cally, the investors, is in itself a public
borrowing of the government. The nancial assets ( i.e., debt instruments
and securities) in the hands of the investors represent a claim to future
cash for which the borrowing entity, at maturity date, must have to pay. It
is, however, in the secondary market that the investing public
make the indirect investment in the borrowing entity, in this case,
the Government ." (Emphasis and underscoring supplied)
Q2. Section 2(2) of RR 14-2012 provides: HEDSIc

"Section 2. Tax Treatment of Interest Income Derived from Government

Debt Instruments and Securities. —
xxx xxx xxx
2. Interest Income derived therefrom is subject to Final Withholding
Tax (FWT) at the rate of twenty percent (20%) pursuant to
Sections 24(B)(1), 25(A)(2), 27(D)(1) and 28(A)(7)(a) or
twenty ve percent (25%) pursuant to Section 25(B) or thirty
percent (30%) pursuant to Section 28(B)(1) of the NIRC of
1997, as amended, payable upon original issuance of
the deposit substitutes ;" (Emphasis and underscoring
supplied)
Does the above provision mean that interest income on all Government Debt
Instruments and Securities shall be payable upon original issuance of the
instrument?
A2. In the case of Zero-Coupon instruments and securities, the Final Withholding Tax
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 (FWT) is payable upon their original issuance. In the case of Interest-Bearing
instruments and securities, the FWT is payable upon payment of the interest.
Q3. Does the imposition of the twenty percent (20%) Creditable Withholding Tax (CWT)
on interest income derived from any other debt instrument not within the
coverage of "deposit substitutes" and RR 14-2012 (now Section 2.57.2[Y] of
Revenue Regulations No. 2-98) apply solely to instruments and securities that
shall be issued or accounts that shall be opened beginning November 23, 2012
upon the RR's effectivity?
A3. The 20% CWT shall apply to each interest payment to be made beginning on
November 23, 2012 or upon the RR's effectivity irrespective of when the
instruments or securities were issued. This covers interest income from current
outstanding instruments, securities, or accounts as of November 23, 2012.
Q4. Section 3(2) of RR 14-2012 provides:
"Section 3. Tax Treatment of Interest Income Derived from Long-Term
Deposits or Investment Certificates. —
xxx xxx xxx
2. Absent any of the characteristics/conditions enumerated in Section
4(1) of these Regulations, interest income from long-term deposit or
investment shall be subject to a Final Withholding Tax (FWT) at the
rate of twenty percent (20%) pursuant to Sections 24(B)(1), 25(A)(2),
27(D)(1) and 28(A)(7)(a) of the NIRC of 1997, as amended."
(Emphasis and underscoring supplied) HIACEa

A4. The above provision should correctly read: "Absent any of the
characteristics/conditions enumerated in Section 3(1) of these Regulations. . . ."
Q5. What is the tax treatment of interest income earned from Long-Term Deposits or
Investment Certi cates by a domestic corporation and resident foreign
corporation?
A5. Interest income earned by a domestic corporation and resident foreign corporation
from Long-Term Deposits not issued by bank or Investment Certi cates that are
not considered deposits or "deposit substitutes" shall be subject to regular
corporate income tax of thirty percent (30%) pursuant to Sections 27(A) and
28(A)(1) of the NIRC of 1997, as amended, subject to 20% CWT required under
Section 7 of RR 14-2012.
Q6. Section 9 of RR 14-2012 provides:
"Section 9. Documentary Stamp Tax. — The original issuance of debt
instruments shall be subject to Documentary Stamp Tax in accordance
with Section 179 of the NIRC of 1997, as amended. Thus, on every original
issue of debt instruments, there shall be collected a documentary stamp
tax of one peso (P1.00) on each two hundred pesos (P200), or fractional
part thereof, of the issue price of any such debt instrument. However, any
assignment or re-assignment of said debt instruments shall be
subject to the same documentary stamp tax mentioned above
pursuant to Section 198 of the NIRC of 1997 ." (Emphasis and
underscoring supplied)
Is the DST imposed in all cases of assignments or re-assignments of debt
instruments?
A6. Any assignment or re-assignment of debt instruments shall be subject to DST at
the same rate imposed on the original instrument pursuant to Section 198 of the
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 NIRC of 1997, as amended. This occurs only when the assignment or re-
assignment of the debt instrument entails changing the maturity date or
remaining period of coverage from that of the original instrument or carries with
it a renewal or issuance of new instruments in the name of the transferee to
replace the old ones. Otherwise, the assignment or re-assignment shall be
exempt from DST by virtue of Section 199(f) or (g) of the NIRC of 1997, as
amended.
All other issuance inconsistent herewith are hereby repealed or modi ed
accordingly.
All revenue o cers and employees are hereby enjoined to give this Circular as
wide a publicity as possible.
This Circular takes effect immediately. acHCSD

(SGD.) KIM S. JACINTO-HENARES

Commissioner of Internal Revenue

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