REVENUE REGULATIONS NO. 17-2020 issued on August 7, 2020 implements the Tax
Neutrality provision of Republic Act No. 11439 (An Act Providing for the Regulation and
Organization of Islamic Banks).
The Regulations cover transactions of Islamic banks, either domestic or foreign,
and Islamic Banking Units in the form of a division, department, office, or branch of a
conventional bank that are authorized to conduct business in accordance with the
principles of Shari’ah pursuant to the guidelines prescribed by the Bangko Sentral ng
Pilipinas (BSP).
The tax treatment of Islamic banking arrangements should be based on their
economic substance rather than their form.Where an Islamic banking arrangement is
economically equivalent to a conventional bank product, the tax treatment of the two
should be the same.Any reference to interest shall apply to gains or profits received and
expenses incurred in Islamic banking arrangements, in lieu of interest income and/or
expenses under the conventional banking transactions.
Any reference to a disposal or lease of an asset shall not apply to any disposal or
lease of an asset by or to a person that is carried out in accordance with Islamic
banking arrangements, as defined by the BSP; Provided that the resulting tax effect on
the Islamic banking arrangement would approximate or be similar to that applicable to
the corresponding conventional banking transactions.
Any reference to an instrument that is carried out in accordance with Islamic
banking arrangements, as defined by the BSP, which produces an additional instrument
required for the purpose of compliance with Shari’ah principles but which will not be
required in any other conventional banking transactions, shall be deemed excluded for
taxation purposes.
The details on the tax treatment of the following Islamic banking arrangements
will be covered in a separate Revenue Memorandum Circular:
• Murabahah (Profit disclosed sale);
• Tawarruq (Commodity Murabahah);
• Salam (Sale with deferred delivery and spot payment);
• Ijarah (Lease);
• Mudarabah Partnership (Profit Sharing Partnership);
• Wakalah Investment (Investment Agency);
• Istisna;
• Musharaka;
• Sukuk; and
• Other Islamic banking transactions with economically equivalent conventional
finance transactions.
For purposes of the Regulations, an Islamic Bank shall ensure that financial
statements are prepared in accordance with the Philippine Financial Reporting
Standards (PFRS) taking into account the differences between Islamic and conventional
banking transactions. Authorized conventional banks with Islamic banking
arrangements shall maintain a system segregating the transactions of the Islamic
banking unit from its conventional banking business.
Authorized Islamic banks shall register with the Bureau of Internal Revenue
similar to a conventional bank following the existing guidelines on business
registration.Islamic banks, including conventional banks with Islamic banking windows,
shall issue receipt on profits/gains/fees derived from its banking operations.