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Tuesday, June 13, 2006
Tax notes: Exemption from limits on interest expense
The receipt of savings and time deposit by a savings bank from its depositors is not an arbitrage scheme. Hence, interest incurred by the savings bank on said savings and time deposits shall not be subject to the interest expense limitation (Bureau of Internal Revenue Ruling DA-083-2006 dated Mar. 6, 2006).
Under the Tax Code of 1997, a taxpayer’s interest expense cannot be fully deductible from gross income.
Interest expense shall be reduced by an amount equal to 38 percent (now 42 percent) of the interest income subjected to final tax.
This limitation was intended to address tax arbitrage schemes wherein income subject to final tax is generated from the proceeds of loans, interests on which are allowed as deduction from gross income subject to the regular tax. (Source: Punongbayan & Araullo)
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