Income Tax Exemption under the National Internal Revenue Code
- Sections 24(B)(1) and 25(A)(2) of the National Internal Revenue Code (NIRC) provide exemption from income tax on interest income earned from the aforementioned long-term deposits or investment certificates.
- The exemption applies only to interest income and does not extend to other forms of income such as gains from trading or foreign exchange gains.
Conditions for Eligibility for Income Tax Exemption
- The depositor or investor must be an individual, including citizen (resident or non-resident), resident alien, or non-resident alien engaged in trade or business in the Philippines.
- Certificates must be held under the name of the individual, excluding corporations or bank/trust department names.
- Long-term deposits or investment certificates must be issued by banks only.
- Maturity period must be at least five years.
- Denominations must meet minimum BSP-prescribed amounts.
Consequences of Pre-Termination of Long-Term Deposits or Investments
- If the deposit or investment is withdrawn or terminated before five years, income tax shall be imposed on the entire interest income earned.
- The tax rate is based on the remaining maturity period at withdrawal:
- Four (4) years to less than five (5) years: 5%
- Three (3) years to less than four (4) years: 12%
- Less than three (3) years: 20%
- This tax is a final tax and must be deducted and withheld by the depository bank from the proceeds.
Legal Effect of the Circular and Enforcement
- Any previous rulings or issuances inconsistent with the clarifications in this Circular are declared void and without legal effect.
- All Internal Revenue officers must widely publicize the contents of this Circular to ensure proper compliance and awareness.
- The Commissioner's directive aims to clarify and standardize the application of income tax exemption on interest income from long-term deposits or investment certificates as prescribed by law.