Interest Expense Deduction

Interest expense deduction limitation is very interesting. In Philippine tax, a corporation cannot deduct the entire interest expense if that corporation earned interest income subject to final tax. There is a limitation computation that a taxpayer should follow. This is based on Section 34(B) of the Tax Code as amended. The interest expense amount shall be reduced by 33% of the interest income subject to final tax.

Why do the government made this rule?

The reason is more on preventing the taxpayer to evade tax. To illustrate this please see below:

Assuming that the no interest expense limitation yet and you have the following interest expense and interest income

Interest Expense - P10,000
Interest Income - P10,000

The interest expense can be claimed as deduction at a rate of 30% which P3,000. However, the interest income only subject to P20% final tax which is P2,000. So effectively, the taxpayer gained P1,000 (P3,000-P2,000). The limitation aims to prevent the taxpayer from manipulating the tax law in placed for its own gain.


Related Regulations - Revenue Regulation 13-00.


Magbayad ng wastong buwis. Consider this as your charity to the Philippines.

Juan Dela Cruz