REVENUE MEMORANDUM CIRCULAR NO. 35-2022 issued on March 31, 2022 prescribes the tax treatment of Murabahah (Profit Disclosed Sale) and Tawarruq (Commodity Murabahah) as Islamic Banking Arrangements pursuant to the tax neutrality provision of Republic Act No. 11439 (An Act Providing for the Regulation and Organization of Islamic Banks) and as implemented by Revenue Regulations (RR) No. 17-2020.
Gains or profits derived from Islamic banking arrangements, in lieu of interest income under the conventional banking transactions, as referred hereunder are subject to tax. As provided under Section 4.3 of RR No. 17-2020, any reference to interest shall apply to gains or profits received and expenses incurred in Islamic banking arrangements, in lieu of interes income and/or expenses under the conventional banking transactions.
The economic substance of a Murabahah Financing (Profit Disclosed Sale) is equivalent to a conventional mortgage loan. In conventional mortgage loan, the property is purchased by the borrower using the loan proceeds. The ownership is transferred to the borrower who repays the amount plus interest pursuant to the loan agreement. The loan is secured by the property. Under Islamic finance arrangement, the Islamic Banks/ Islamic Banking Unit (IB/IBU) purchases the property and subsequently sells the same to the client at a cost plus an agreed profit margin.
Tax Neutrality (in Murabahah Financing):
| Conventional Mortgage Financing | Islamic Finance Arrangement | |
|---|---|---|
| Bank/ IB/IBU | Interest income derived from mortgage financing shall be subject to regular Income Tax and Gross Receipts Tax. However, the Withholding Tax herein shall apply whenever the payor is classified as top withholding agent. | Gains or profits derived from Islamic finance arrangement shall be subject to regular Income Tax and Gross Receipts Tax. However, the Withholding Tax herein shall apply whenever the payor is classified as top withholding agent.: Provided, That the effective profit method shall be used in calculating the amortized cost of the subject financial instruments measured at amortized cost and of allocating the income or expense over the relevant period. |
| Borrower/ Client/ Customer | Interest payments made by the borrower shall not be subject to Withholding Tax. However, the Withholding Tax herein shall apply whenever the payor is classified as top withholding agent. | Gains or profits payments made by the customer shall not be subject to Withholding Tax. However, the Withholding Tax herein shall apply whenever the payor is classified as top withholding agent. |
| Mortgage instruments executed shall be subject to Documentary Stamp Tax (DST). | Equivalent Islamic finance instruments executed shall be subject to Documentary Stamp Tax (DST), which shall be computed on the basis of the equivalent amount actually loaned or given at the time of execution of the mortgage, pledge or deed of trust under the conventional mortgage transaction. | |
| Real Property Finance: Transfer of real property from the seller to the borrower/buyer shall be subject to Capital Gains Tax (CGT) if the land was held as capital asset or Creditable Withholding Tax (CWT) and ValueAdded Tax (VAT) if the land was held as ordinary asset. Additionally, said transfer of real property shall be subject to DST. | land was held as capital asset or CWT and VAT, if applicable, if the land was held as ordinary asset. Additionally, said transfer of real property shall be subject to DST: Provided, however, that transfer of real property from the IB/IBU to the customer/buyer shall be exempt from CGT, CWT, VAT and DST pursuant to Section 4.4 and 4.5 of RR No. 17-2020. | |
| Car Finance: The sale of car to the borrower shall be subject to VAT. | The sale of car by the vendor to the IB/IBU shall be subject to VAT which shall be reimbursed by the customer. |
The abovementioned forms were reported as lost by Revenue Officers Jeffrey M. Butial, Alpha Joy S. Galay, Jean Mae D. Nanol-Javier and Aida E. Baguio of Revenue District Office No. 27. Consequently, all official transactions involving the use of the lost triplicate copies of the issued TIS should be verified. With respect to the lost unused sets, the same have been cancelled and all official transactions involving the use thereof are considered as invalid.