Interest on Deficiency Taxes as a Deductible Expense (Philippine Income-Tax Perspective, updated to 1 July 2025)

1. What “interest on deficiency tax” is—and what it is not

Concept	Statutory basis	Trigger	How long it runs	Current rate¹	Character
Deficiency interest	§249 (A)(1), NIRC	A valid assessment shows a deficiency (under-payment) of any national internal-revenue tax.	From the original due date of the tax up to either (a) full payment or (b) the date stated in the notice/demand, whichever comes first.	12 % p.a. (double the BSP legal rate of 6 % after the TRAIN Act²)	Purely compensatory—payment for the government’s lost use of money.
Delinquency interest	§249 (B), NIRC	Failure to pay the amount stated in the notice/demand on or before the date fixed therein.	From the day after the due date in the notice until full payment.	Same rate	Compensatory; often discussed together with surcharges and penalties.

¹ Rate history: 20 % p.a. until 31 December 2017; TRAIN (RA 10963) switched to “double the legal interest rate for loans or forbearance of money” (now 12 %). ² BSP Circular 799 (2013) set the legal interest at 6 %; still unchanged as of July 2025.

2. General rule on deductibility of interest expenses

Section 34 (B)(1), NIRC allows “interest on indebtedness” paid or incurred within the taxable year in carrying on a trade or business to be deducted subject to:

the anti-tax-arbitrage ceiling (deduction is reduced by 20 % of the taxpayer’s interest income that has been subjected to final tax), and
the related-party/thin-capitalisation rules under §34 (B)(2), §36, and transfer-pricing regulations.

The statute is silent on interest that arises by operation of law, such as on a tax deficiency. The controversy therefore turns on whether deficiency interest can be squeezed into the phrase “interest on indebtedness.”

3. The BIR’s flip–flopping administrative positions

Year	Issuance	BIR position	Notes
1980s–mid-1990s	Several private rulings (e.g., BIR Ruling 068-89)	Allowable	Reasoning: the amount is compensatory interest—government is a creditor.
1997	Tax Reform Act rewrites §249 but not §34.	No explicit stand.	Fuelled debate but no definitive policy.
2003–2008	Rulings such as ATR-023-2000, DA-321-07	Not deductible	Treated deficiency interest as akin to a penalty “imposed for violation of law,” citing §34 (C)(1)(b).
Dec 10 2004	BIR Ruling DA-491-04	Deductible	Lengthy discussion: (i) not a penalty; (ii) arms-length creditors would charge interest; (iii) Congress could have expressly disallowed but did not.
2010–2012	Several adverse rulings (e.g., BIR Ruling 053-2011)	Not deductible	Re-characterised interest as part of “civil penalty.”
RMC 31-2013	Public guidance	Deductible (again)	Emphasised compensatory nature; explicitly overruled earlier disallowance rulings.
RMC 23-2014 (and subsequent FAQs)	Not deductible	Argued that §34(B) speaks of “indebtedness” voluntarily assumed, whereas tax is a statutory duty.
2018–2025	No new circular squarely reversing RMC 23-2014, but later private rulings diverge: some allow, others do not, depending on facts (e.g., whether negligence is involved).	Status quo: BIR examiners normally disallow; taxpayer must litigate or seek a confirmatory ruling.

Key takeaway: As of 2025 the BIR’s administratively prevailing view is disallowance, but there is no single, current RMC that absolutely settles the matter.

4. Judicial guidance

Philippine courts have so far not squarely resolved the deductibility question. Relevant decisions:

Philex Mining v. CIR (G.R. No. 125704, 28 Aug 1998) – Discusses nature of §249 interest (compensatory vs. penal) but involved refund jurisdiction, not deductibility.
CIR v. Filinvest (G.R. No. 198128, 25 Jul 2022) – Supreme Court remarked obiter that “interest under §249 is not a surcharge or penalty” but the case was about VAT zero-rating; deduction not in issue.
CTA Cases – A line of division divisions has allowed deduction where the taxpayer proved the amount and business nexus, but many un-reported compromise decisions show the BIR prevailing on audit by sheer administrative presumption.

Until the Supreme Court rules directly, litigation risk remains high.

5. Arguments for deductibility

Textual – §34(B) uses broad words: “interest upon indebtedness.” Once assessed, the deficiency becomes an obligation or debt payable to the State; it is neither a surcharge (§249 (A)(2)) nor a penalty (§34 (C)(1)(b)).
Compensatory character – Even the BIR now labels the interest “compensatory.” Under civil-law principles (Art. 1958, Civil Code), compensation for forbearance of money is “interest.”
Symmetry – If a taxpayer overpays tax, the government returns the amount with 6 % legal interest (BSP Circular 799). If that interest constitutes taxable income to the taxpayer, symmetry demands that mirror-image interest paid by the taxpayer be deductible.
Comparative law – U.S. corporations can deduct interest on federal tax deficiencies (§163 IRC); Philippine tax provisions were patterned on the U.S. Code and have no express carve-out.

6. Arguments against deductibility

Legislative intent – Congress distinguished interest (§34 B) from penalties (§34 C); allowing deduction would neutralise §249’s deterrent effect.
Public-policy doctrine – Expenses “contrary to law, morals or public policy” are not deductible; late or deficient tax payment is a breach of statutory duty, hence disfavoured.
Plain-meaning of “indebtedness” – In common usage (and in jurisprudence on §34 B’s predecessor §30), indebtedness refers to borrowings. A tax assessment is not a consensual loan.
Administrative consistency – The BIR’s latest public issuance (RMC 23-2014) treats the amount as non-deductible; deference under Chevron-style principles.

7. Interaction with other income-tax rules

Issue	If the deduction is allowed	If disallowed
Anti-arbitrage 20 % haircut (§34 B last par.)	Apply haircut before deducting.	N/A
Withholding tax on interest	Not applicable – §249 interest is not income to any lender subject to WHT.	Same.
Fringe-benefit gross-up (for employer assessments)	None – payment benefits the employer as such, not employees.	Same.
Minimum Corporate Income Tax (MCIT)	Reduces regular taxable income; MCIT comparison may become relevant.	No effect; MCIT more likely to apply.

8. Accounting treatment vs. tax treatment

Financial-reporting – Under PFRS/IFRIC 23, uncertain tax-position interest is recognised as a finance cost in profit or loss; no distinction between compensatory and penal.
Tax-return adjustments – Create a separate account (e.g., “Interest on Tax Assessments – Book”) then add-back or claim deduction in the tax reconciliation schedule, depending on the company’s chosen position and risk appetite.

9. Local-tax counterpart

Local Government Code §255 imposes 2 % per month (24 % p.a.) interest on unpaid local taxes, fees and charges.
Neither the NIRC nor the LGC expressly forbids deduction. BIR rulings are silent; many practitioners deduct the interest, subject to the same controversies as national-tax deficiency interest.

10. Practical compliance roadmap (2025)

Document the deficiency – Keep the Final Assessment Notice, Formal Letter of Demand, and proof of payment.
Quantify accurately – Separate: (a) basic tax, (b) surcharge, (c) interest, (d) compromise. Only (c) is debatably deductible.
Assess materiality – If the interest is small relative to taxable income, consider non-deduction to avoid a potential high-risk audit issue.
Seek advance ruling – For large exposures, a Customised Tax Ruling (CTR) from the BIR may secure the deduction (though processing time is unpredictable).
Maintain a bridging file – Prepare a memo citing §249, §34(B), relevant rulings, and accounting standards to defend the position in case of future audit.
Monitor legal developments – A single Supreme Court ruling could settle the debate; revisit policy annually.

11. Key take-aways

The NIRC does not expressly bar the deduction of interest on deficiency taxes, and there are solid doctrinal arguments to allow it.
Administrative practice currently leans toward disallowance, and most assessments settle on that basis.
Taxpayers may claim the deduction—but should be ready to litigate or at least defend the position with a robust legal memorandum and contemporaneous documentation.
The issue remains one of the “grey areas” in Philippine taxation; prudent taxpayers balance cash-tax savings against the potential cost of a protracted dispute.

Quick reference

Allowable? – Debatable; presently disallowed by default BIR stance (RMC 23-2014) but no final Supreme Court ruling. Rate to book? – 12 % p.a. (deficiency) plus 12 % p.a. (delinquency, if unpaid beyond demand date). Best practice? – Claim only with strong legal opinion; otherwise add-back in the annual income-tax reconciliation.

Prepared 1 July 2025 · Time zone: Asia/Manila