TAX ON SUKUK or Islamic bonds will be determined based on how the gains or profits are specified in their contracts, the Bureau of Internal Revenue (BIR) said.
Sukuk are Islamic financial certificates that operate similarly to bonds but are structured to comply with Shari’ah law, which prohibits interest.
In a circular, the bureau said that a Sukuk bond’s gains or profits would be “calculated through profit-sharing ratios, rental income, mark-up or price differentials, or the sale of underlying assets.”
The BIR added that the gains or profits would depend on the contractual arrangements outlined in the Sukuk documentation.
Gains or profits realized from Sukuk transactions with a maturity of less than five years will be subject to a 20% final withholding tax.
If Sukuk holders withdraw their bonds before maturity, gains and profits will be subject to a 5% final withholding tax for bonds with maturities of under four years, 12% for those with under three years, and 20% for those with less than three years.
Conversely, gains or profits from Sukuk with a maturity of more than five years will be excluded from gross income and exempt from income tax, the BIR added.
A 25% final withholding tax will be imposed on gains and profits realized by Sukuk shareholders who are non-resident aliens not engaged in trade or business in the Philippines, as well as non-resident foreign corporations.
Gains or profits realized by the originator or obligor, arranger, manager, and underwriter from Sukuk transactions will be subject to regular income tax and value-added tax (VAT), as applicable.
Meanwhile, gains or profits from special purpose vehicles will be subject to regular income tax but exempt from VAT, the bureau said.
All Sukuk instruments will also be subject to a documentary stamp tax unless exempted, it noted.
“Any disposal or lease of the underlying asset, and execution of any additional instrument required in a Sukuk transaction, for the purpose of compliance with Shari’ah principles but which will not be required in a conventional bond transaction, shall be deemed excluded for taxation purposes,” BIR said.
All banks, including Islamic banks and conventional banks’ Islamic banking units or non-bank financial intermediaries, will classify and measure a Sukuk investment either at amortized cost, fair value through other comprehensive income, or fair value through profit or loss.
The investment will also be measured based on the contractual cash flow characteristics of the bond under Philippine Financial Reporting Standards, according to the BIR.
When a Sukuk is issued, it will initially be recognized at fair value, typically at its transaction price, the bureau noted. Transaction costs directly attributable to the issuance will be deducted from the initial carrying amount.
A Sukuk instrument will be assessed for impairment based on expected credit losses. It will be derecognized when redeemed, repurchased, matured, or when the contractual rights to cash flows expire.
For disclosures, a Sukuk instrument will be presented on the balance sheet according to its classification.
“Additionally, ensure that the financial instruments provide the required disclosures, including information about the nature, terms and extent of risks arising from financial instruments, including information about the nature, terms and extent of risks arising from financial instruments, as well as the accounting policies applied.”
The tax treatment of Sukuk bonds are based on Revenue Regulations No. 17-2020, which seeks a “neutral tax treatment” of equivalent transactions between Islamic banks and conventional banks. — Beatriz Marie D. Cruz
