Interesting fact on T-bonds: Is your interest income taxable?

A foreign entity may invest in another country in the form of securities, bonds and the like.

- Julpha Clarrise Policina

Under the Tax Code, securities refer to shares of stock in a corporation and rights to subscribe for or to receive such shares. This term also includes bonds, debentures, notes or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupons or in registered form. As these are investments, they typically earn income, such as interest income.

How then is the interest income derived from these types of investments treated for tax purposes in the Philippines?

Generally, interest paid to a nonresident foreign corporation (NRFC) is subject to 25-percent final withholding tax (FWT) or 20-percent FWT if the interest arises from a foreign loan. The FWT rate may even be reduced or exempted under an applicable tax treaty, subject to compliance with treaty conditions and administrative requirements to avail of treaty benefits.

In a recent Court of Tax Appeals (CTA) decision, a corporation established in the Netherlands invested in Philippine treasury bonds (T-bonds) issued by the Bureau of Treasury (BTr). Upon payment of the bonds, the interest income was subject to a 20-percent FWT pursuant to Section 28(B)(5)(a) of the Tax Code.