BIR issues rules on tax treatment of Islamic banks

THE BUREAU of Internal Revenue (BIR) has issued the guidelines to implement the neutral tax treatment of equivalent transactions between Islamic banks and conventional banks.

BIR Commissioner Caesar R. Dulay issued Revenue Regulations No. 17-2020 dated June 22 to serve as the implementing rules and regulations (IRR) for the tax neutrality provision under Republic Act No. 11439 or “An Act Providing for the Regulation and Organization of Islamic Banks” enacted in August 2019.

The IRR was signed by Finance Secretary Carlos G. Dominguez III on Aug. 5. The rules will take effect 15 days after their publication in a newspaper on Saturday.

“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 of 1997), as amended, such that Islamic banking transactions are taxed no more heavily (and no more lightly) than conventional banking transactions,” RR 17-2020 read.

The BIR said the tax treatment of Islamic banking arrangements will be based on the “economic substance rather than their form.”

It said the tax treatment will be the same for Islamic bank arrangements and their counterpart products from traditional banks if they are “economically equivalent.”

“Any reference to interest shall apply to gains or 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 rules state.

The BIR said it will issue a separate circular to discuss the tax treatment of Islamic banking arrangements on Murabahah, Tawarruq, Salam, Ijarah, Mudarabah Partnership, Wakalad Investment, Istisna, Musharaka, Sukuk and other transactions.

The bureau said the financial statements prepared by Islamic banks, following the Philippine Financial Reporting Standards, should maintain a system separating the transactions of their Islamic banking arm from conventional banking operations.

It said Islamic banks should also register with the BIR based on existing guidelines on registration of businesses, while traditional banks with Islamic banking windows are also mandated to issue receipts on the profits made from Islamic banking operations. — B.M. Laforga