BIR Issues Guidelines on Tax Treatment of Islamic Banks
BIR Tax Treatment

BIR Issues Guidelines on Tax Treatment of Islamic Banks

The Bureau of Internal Revenue (BIR) issues guidelines to implement neutral tax treatment between Islamic banks and conventional banks. 

BIR Commissioner Ceasar Dulay states, “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.”

Further, he continues that the tax treatment of Islamic banking arrangements will be based on economic substance rather than their form. 

The BIR Revenue Regulations No. 17-2020 will serve as the implementing rules and regulations (IRR) for the tax neutrality provision under Republic Act No. 11439, also known as “An Act Providing for the Regulation and Organization of Islamic Banks.”

The IRR states that:

  • “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.”

For the purposes of these regulations, the BIR added that an Islamic bank shall ensure that financial statements are prepared in accordance with the Philippine Financial Reporting Standards (PFRS). They must also maintain a system separating their Islamic and conventional banking transactions. 

The Bureau also reminds authorized Islamic banks to register with the BIR, following the existing guidelines of business registration while mandating traditional banks with Islamic banking windows to issue receipts on the profits made from Islamic banking transactions.

Finance Secretary Carlos Dominguez III signed the IRR on August 5 and it will take effect 15 days thereafter.

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