The Philippines Bureau of Internal Revenue (BIR) is applying equal tax treatment to Sukuk investments, pursuant to ‘tax neutrality’ provisions in Revenue Regulations No 17-2020 and Act 11439 covering the regulation and organization of Islamic banks.
In its 18th July 2024 circular, BIR said this equal taxation “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”.
Final withholding tax (FWT) applies at redemption if the Sukuk is maturing within five years on a sliding scale – with 20% if three years of less remains, 12% for up to four years and capped at 5% if in the fifth year. Longer term Sukuk will attract no tax. A flat 25% FWT applies to all foreign individuals and entities.
The BIR said the Sukuk investment contractual cashflow measurement for taxation can be classified on the basis of:
- amortized cost, using the effective profit method;
- fair value, with changes recognized in other comprehensive income, and;
- fair value, with changes recognized in profit or loss.
“The gain or profit in Sukuk is determined based on the specific structure and terms of the Sukuk issuance. It can be calculated through profit-sharing ratios, rental income, mark-up or price differentials, or the sale of underlying assets.”
Tax is waived for Sukuk-related transactions – such as disposal or lease of an underlying asset – to comply specifically with Shariah principles if these are not required for conventional instruments. Transaction costs directly attributable to the Sukuk issuance will be deducted from the initial carrying amount.
The BIR said value-added tax (VAT, currently at 12% in the Philippines) also applies, with VAT exemption given to gains and profits by special purpose vehicles. Documentary stamp tax applies to all Sukuk, unless exempted by Section 199(g) of the 1997 National Internal Revenue Code.
The Philippines made its first sovereign Sukuk issuance on the 29th November 2023 for US$1 billion and a tenor of 5.5 years, using real estate assets under Ijarah and Wakalah, together with a commodity Murabahah element.
