MANILA, Philippines — Transactions made through Islamic banking institutions should have the same tax treatment as those made through conventional banks, according to the Bureau of Internal Revenue (BIR).
This is pursuant to Revenue Regulation No. 17-2020, signed by BIR Commissioner Caesar Dulay on June 22, which implements the tax neutrality provisions of Republic Act 11439, otherwise known as the Islamic Banking Act.
“Islamic banking transactions must have a parity of tax treatment of equivalent conventional banking transactions within the provisions of the NIRC (National Internal Revenue Code), as amended, such that Islamic banking transactions are taxed no more heavily (and no more lightly) than conventional banking transactions,” Dulay said.
According to the BIR, 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 conventional bank product, the tax treatment of the two should be the same,” it added.
Given this, the BIR reminded authorized Islamic banks to register with the BIR, similar to conventional banks following the existing guidelines on business registration.
“Islamic banks, including conventional banks with Islamic banking windows shall issue receipt on profits or gains or fees derived from its banking operations,” the bureau said.
The BIR said any reference to interest shall apply to gains and 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 Bangko Sentral ng Pilipinas, 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,” the BIR said.
“Any reference to an instrument that is carried out in accordance with Islamic banking arrangements as defined by the Bangko Sentral ng Pilipinas, 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,” it added.
The BIR said detailed provisions on the tax treatment of Islamic banking arrangements would be covered in a separate revenue memorandum circular.
For purposes of these regulations, the BIR said 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 are told to maintain a system segregating the transactions of the Islamic banking unit from its conventional banking business.