REVENUE REGULATIONS NO. 14-2012 issued on November 7, 2012 prescribes the proper tax treatment of interest income earnings on financial instruments and other related transactions. The tax treatment of interest income derived from government debt instruments and securities is as follows: a. Government Debt Instruments and Securities, including Bureau of Treasury (BTr) issued instruments and securities such as Treasury bonds (T-bonds), Treasury bills (T-bills) and Treasury notes, shall be considered as deposit substitutes irrespective of the number of lenders at the time of origination if such debt instruments and securities are to be traded or exchanged in the secondary market. b. Interest income derived therefrom is subject to Final Withholding Tax (FWT) at the rate of 20% pursuant to Sections 24(B)(1), 25(A)(2), 27(D)(1) and 28(A)(7)(a) or 25% pursuant to Section 25(B) or 30% pursuant to Section 28(B)(1) of the National Internal Revenue Code (NIRC) of 1997, as amended, payable upon original issuance of the deposit substitutes. c. The original issuance of these debt instruments is subject to Documentary Stamp Tax (DST) pursuant to Section 179 of the NIRC of 1997, as amended. d. The mere issuance of government debt instruments and securities is deemed as falling within the coverage of ‘deposit substitutes’ irrespective of the number of lenders at the time of origination, and therefore interest income derived therefrom shall be subject to the applicable FWT rate imposed on deposit substitutes as prescribed under the NIRC of 1997, as amended. The tax treatment of interest income derived from Long-Term Deposits or Investment Certificates is as follows: a. Interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from Income Tax under Section 24(B)(1) and 25(A)(2) of the NIRC of 1997, as amended, provided that the following characteristics/ conditions are present: i. the depositor or investor is an individual citizen (resident or non-resident), a resident alien or a non-resident alien engaged in trade or business in the Philippines; ii. the long-term deposits or investment certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank; iii. the long-term deposits or investments must be in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BSP; iv. the long-term deposits or investments must be issued by banks only and not by other financial institutions; v. the long-term deposits or investments must have a maturity period of not less than 5 years; vi. the long-term deposits or investments must be in denominations of Ten thousand pesos (P10,000.00) and other denominations, as may be prescribed by the BSP; vii. the long-term deposits or investments should not be terminated by the investor before the 5th year, otherwise they shall be subjected to the graduated rates of 5%, 12% or 20% on interest income earnings; and viii. except those specifically exempted by law or regulations, any other income such as gains from trading, foreign exchange gain shall not be covered by Income Tax exemption. b. 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 FWT at the rate of 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. c. Interest income from long-term deposit or investment that is pre-terminated by the depositor or investor before the 5th year shall be subject to the following graduated rates of FWT on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof as follows: Four (4) years to less than five (5) years — 5%; Three (3) years to less than four (4) years — 12%; and Less than three (3) years — 20%. d. Interest income from long-term deposit or investment shall be subject to a FWT at the rate of 25% if received by a non-resident alien not engaged in trade or business in the Philippines pursuant to Section 25(B) of the NIRC of 1997, as amended. e. Interest income from long-term deposit or investment shall be subject to a FWT at the rate of 30% if received by a non-resident foreign corporation pursuant to Section 28(B)(1) of the NIRC of 1997, as amended. f. Interest income from long-term deposit or investment shall be subject to regular Income Tax at the rate of 30% if received by a domestic corporation and resident foreign corporation pursuant to Sections 27(A) and 28(A)(1) of the NIRC of 1997, as amended. The tax treatment of interest income derived from currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements derived from sources within the Philippines is as follows: a. Subject to a FWT of 20% if the interest income is received by citizens; resident aliens; non-resident aliens engaged in trade or business in the Philippines; domestic corporations; and resident foreign corporation. b. Subject to a FWT at the rate of 25% if the interest income is received by non-resident aliens not engaged in trade or business in the Philippines. c. Subject to FWT at the rate of 30% if received by a non-resident foreign corporation, unless the interest income is from foreign loans contracted on or after August 1, 1986, in which case, it is subject to a FWT of 20%. The tax treatment of interest income derived from a depository bank under the Expanded Foreign Currency Deposit System is as follows: a. Subject to a FWT of 7.5% if the interest income is received by citizens; resident aliens; domestic corporations; and resident foreign corporation. b. Any income of non-residents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from Income Tax. c. If a bank account that is jointly in the name of a non-resident citizen such as an overseas contract worker or a Filipino seaman and his/her spouse or dependent who is a resident in the Philippines, 50% of the interest income from such bank deposit shall be treated as exempt while the other 50% shall be subject to a FWT of 7.5%. d. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with non-residents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BSP to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular Income Tax payable by banks. e. Interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of 10%. The tax treatment of interest income derived from offshore banking units is as follows: a. Income derived by offshore banking units authorized by the BSP, from foreign currency transactions with non-residents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units shall be exempt from all taxes except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board which shall be subject to the regular Income Tax payable by banks. b. Interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall be subject only to a FWT at the rate of 10%. c. Any income of non-residents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from Income Tax. Unless otherwise provided by law or regulations, interest income derived from any other debt instruments not within the coverage of ‘deposit substitutes’ and these Regulations shall be subject to a Creditable Withholding Tax (CWT) at the rate of 20%. For this purpose, the income payor is required to withhold and remit the said tax to the Bureau of Internal Revenue in accordance with Sections 2.57.3, 2.57.4 and 2.58 of Revenue Regulations No. 2-98, as amended. In order for an instrument to qualify as a “deposit substitute” pursuant to Section 22 (Y) of the NIRC of 1997, as amended, the borrowing must be made from 20 or more individual or corporate lenders at any one time. Corollarily, the 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 19 or less individual or corporate lenders at any one time. However, 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. The original issuance of debt instruments shall be subject to DST 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 DST of P 1.00 on each P 200, 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 DST mentioned above pursuant to Section 198 of the NIRC of 1997.