Question & AnswerQ&A (BIR REVENUE REGULATIONS NO. 13-2000)
The scope of BIR Revenue Regulations No. 13-2000 is to implement Section 34(B) of the Tax Code of 1997 regarding the requirements for deductibility of interest expense from the gross income of a corporation or individual engaged in trade, business, or profession.
Interest is defined as the payment for the use, forbearance, or detention of money, including the amount paid for the borrower’s use of money during the loan term and for the detention of money after its repayment due date.
A taxpayer refers to a person, natural or juridical, engaged in trade, business, or profession, excluding those earning compensation income from an employer-employee relationship.
The requisites include: an existing indebtedness, interest expense incurred on such indebtedness, the indebtedness belongs to the taxpayer, it is connected to the taxpayer’s trade/business/profession, the interest was paid or incurred during the taxable year, the interest is stipulated in writing, it is legally due, it is not between related taxpayers as defined by the law, not incurred to finance petroleum operations, and not treated as capital expenditure if incurred to acquire property.
The allowable interest expense deduction must be reduced by a percentage of interest income subject to final withholding tax earned during the taxable year—41% for 1998, 39% for 1999, and 38% from 2000 onwards.
Yes, interest paid on unpaid business-related taxes is fully deductible and not subject to the limitation on interest expense deduction.
For individuals on a cash-basis, advance interest payment is deductible only in the year the indebtedness is fully paid, except when the liability is amortized periodically, in which case interest corresponding to the principal paid that year is deductible.
No, interest expenses between related taxpayers as defined in Section 36(B) of the Tax Code are not deductible.
No, interest incurred to finance petroleum exploration operations in the Philippines is not deductible from gross income.
Yes, taxpayers may opt to deduct the full interest expense incurred on capital expenditures in the year incurred or treat it as a capital expenditure and amortize it periodically.