Borrowing and lending money, whether or not made in writing, is an everyday commercial transaction among companies and individuals on business in order to survive a competitive business climate. On the part of the lender, Philippine laws allow the imposition of interest on borrowing and lending money for the temporary use of the lender’s money for the borrower’s own benefit. The imposition of interest is allowed to make up for any benefit that should have been for the lender had the lender been able to use his money instead of lending it.
In order to regulate the rate of interest in the Philippines, the Bangko Sentral ng Pilipinas (BSP) is the government agency that has been empowered to fix the rate of interest for loan or forbearance of any money, goods or credit, in the absence of an express contract as to such rate of interest. As early as Dec. 10, 1982, the BSP issued Circular No. 905, series of 1982, that sets the rate of interest for the loan or forbearance of any money, goods or credits, in the absence of express contract as to such rate of interest, at 12 percent per annum.
Aside from borrowing and lending money among individuals and companies, there is also an instance where an employer lends money to his employee free of interest or at a rate lower than 12 percent. Under Revenue Regulations (RR) No. 3-98 issued by the Bureau of Internal Revenue (BIR) on May 21, 1998, if this loan free of interest or at a rate lower than 12 percent is extended by an employer to an employee (except a rank-and-file employee defined under the Labor Code), then the interest foregone by the employer or the difference of the interest assumed by the employee and the rate of 12 percent is considered a taxable fringe benefit. Perhaps, this 12 percent rate of interest mentioned in the RR No. 3-98 has the BSP Circular No. 905, series of 1982, as its basis. Tax wise, this fringe benefit on the foregone interest is subject to fringe benefits tax of 32% on the grossed-up monetary value of the fringe benefit. The grossed-up monetary value of the fringe benefit, in turn, is computed by dividing the actual monetary value of the fringe benefit by 68%.
On 21 June 2013, the BSP issued Circular No. 799, series of 2013, which reduced the above rate of interest from 12% per annum to 6% per annum. This recent BSP Circular which took effect on 1 July 2013 may have an impact on borrowing and lending transactions, more particularly, on those loans extended by an employer to an employee (except a rank-and-file employee) free of interest or at a rate lower than 12 %. It is worthy to note that RR No. 3-98 expressly states that the benchmark interest rate of 12% shall remain in effect until revised by a subsequent regulation. Considering that BSP Circular No. 799, series of 2013, had already been in effect since 1 July 2013 and that there had yet been no subsequent BIR issuance reducing the benchmark interest rate of 12% to 6%, there may be a conflict as to what benchmark interest rate will be used for purposes of computing the actual monetary value of the fringe benefit, the gross monetary value of the fringe benefit, and consequently, the fringe benefits tax due. For example, if an employer lends PhP10,000.00 to an employee (except a rank-and-file employee), without any agreement as to the rate of interest, the interest due under the 12% interest rate regime is PhP1,200.00 while the interest due under the 6% interest rate regime is PhP600.00. Being the actual monetary value of the fringe benefit, this interest due will then be the basis of computing the gross monetary value of the fringe benefit, and consequently, the fringe benefits tax due. Hence, there may be the risk of being assessed with deficiency fringe benefits tax.
Meanwhile, although there is a basis to argue on the use of 6% interest rate on loans to employees, it may be prudent to await any clarification by the BIR through a regulation or circular on this matter.
Maria Ofelia B. Galura is an Assistant Manager from the Tax Group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email manila@kpmg.com or rgmanabat@kpmg.com.
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