Question & AnswerQ&A (BIR REVENUE MEMORANDUM CIRCULAR NO. 12-93)
A taxpayer obtains a loan from a bank and invests the loan proceeds in treasury bills or money market instruments, often in a different bank. The taxpayer claims deduction of the interest expense from the loan against gross income while the investment income is just subjected to final withholding tax.
The interest expense is disallowed because it is considered paid or accrued on non-business or non-trade indebtedness under Section 29(b) of the National Internal Revenue Code (NIRC).
The offer to pay and actual payment must be made not later than March 31, 1993.
The minimum basic deficiency tax payable shall not be less than the difference between the tax on the disallowed interest expense and the tax withheld on the interest earned.
An interest charge of 20% per annum is added to the deficiency income tax due from the date the final income tax return is required to be filed until the date of payment.
The President or an Authorized Officer of the taxpayer must sign the Offer to Pay or Settle.
The offer must be accompanied by a certificate of withholding tax verifying the interest earned and the tax withheld, such as the Certificate of Creditable Withholding Tax (BIR Form No. ___).
No Offer or Settlement to pay deficiency income tax arising from back-to-back loan transactions shall be entertained after the deadline.
A 35% corporate income tax rate is applied to the entire disallowed interest expense claimed.
A final withholding tax of 20% is applied on the interest earned from the investment of the loan proceeds.
The taxpayer must submit the "pink" copy of the Authority to Accept Payment (ATAP) to the issuing Officer to be attached to the docket along with the approved Offer to Pay.
Its purpose is to facilitate collection of deficiency income taxes from contested cases involving back-to-back loan schemes and encourage voluntary settlement before final assessment.
Section 29(b) of the National Internal Revenue Code (NIRC) is cited.