BIR Ruling [DA-012-02]

January 30, 2002 BIR RULING [DA-012-02] 24 (B) (1); 25 (A) (2); #30-2001 Metropolitan Bank & Trust Company Metrobank Plaza, Sen. Gil Puyat Avenue Makati City Attention: Ms . Josefina E . Sulit Senior Vice President and Trust Officer Gentlemen : This refers to your letter dated May 7, 2001 requesting for the certificate of tax exemption from the 20% final tax imposed under Section 24(B)(1) of the 1997 Tax Code of the interest income from long term deposit or investment in the form of Common Trust Funds (CTFs), individual trust and investment management accounts pursuant to the memorandum of the Monetary Board dated January 13, 2000. It is represented that by virtue of the memorandum of the Monetary Board, the bank's trust department or investment management department shall be responsible for obtaining the tax exemption certifications which may be required by the BIR for the interest-bearing investments where the common trust funds, individual trust funds and investment management funds are invested; that it appears from the standard Revocable Trust Agreement, which you submitted, whereby the Trustee shall be the bank for long term individual trust accounts that the Trustor desires to create a Long Term Trust within the purposes and intent of Section 24(B)(I) of the Tax Code of 1997 for the benefit of his designated beneficiaries; that the Trustor desires to appoint the Trustee bank to act as such for purposes of administering and managing the Long Term Trust sought to be created by the Agreement; that the Long Term Trust shall take effect upon final constructive or actual delivery of the fund to the Trustee and shall continue to be in full force and effect until revoked by the Trustor during his lifetime or upon the final distribution of the Trust Estate to the beneficiaries; that the receipt of the initial fund contribution and receipts of additional funds shall properly be documented and dated for determining the minimum five (5) year holding period for tax-exempt purposes of` the said fund which shall form part of the Trust Estate; that the income and the gains and losses realized and unrealized from the asset of the Trust Estate shall be credited or charged against the Trust Estate; that the fund portion of the Trust Estate is invested in fixed income generating investments and does not guarantee a yield, return or income by the Trustee as the income of the investments may fall or rise depending on prevailing market conditions; that the trust agreement shall be revocable and the Trustor reserves all the rights and powers to alter, amend, revoke or terminate the trust agreement or any of its terms, in whole or in part, subject to the giving of a 30-day prior written notice by the Trustor to the trustee; that to ensure that the agreement continually retains its long-term character, no part of the Fund may be withdrawn within a period of five (5) years from the date of agreement; and that in the event of the withdrawal by the Trustor or assignment or transfer of the trust agreement within the 5-year period, the corresponding final tax shall be withheld and remitted to the BIR in accordance with the pertinent provisions of the Tax Code of 1997. In reply, please be informed that the term "long term deposit or investment certificate" is defined under Section 22(F) of the Tax Code in the following manner: "The term "long term deposit or investment certificate" shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations may be prescribed by the BSP." In BIR Ruling No. 30-2001 dated July 24, 2001, it was ruled that the trust instrument to be used to generate long-term deposit or investment determines the income tax exemption of the individual investor in the income earned. Thus, Sections 24(B)(1) and 25(A)(2) of the Tax Code provide for the following requirements for income tax exemption which must be strictly complied with: The long-term deposit or investment 1. Must have a maturity of not less than five (5) years; 2. Must be in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts or other forms which must be prescribed by the Bangko Sentral ng Pilipinas; 3. Must be issued by banks only (not by nonbank financial intermediaries and finance companies); 4. Must be issued to individual citizen or resident alien or non-resident alien engaged in trade or business within the Philippines only; 5. Must be in denominations of Ten thousand pesos (P10,000) or other denominations as may be prescribed by the Bangko Sentral ng Pilipinas; and 6. Should not be terminated by the holder before the fifth year. Issuance of a tax exemption certificate is not necessary as the taxability of long-term deposit or investments' interest income of the above-stated individuals is dependent on the full compliance of the above requisites; otherwise, a final tax of twenty percent (20A%) shall be imposed, or, if the investment or deposit is pre-terminated before maturity, the following rates shall apply (based on the holding period of the instrument): Four (4) years to less than five (5) years - 5% Three (3) years to less than four (4) years - 12% Less than three (3) years - 20% Based on the foregoing, the issuance of a tax exemption certificate on the standard Revocable Trust Agreement which was submitted by Metropolitan Bank & 'Trust Company to this office is not necessary as the taxability of long-term deposit or investment's interest income is dependent on the full compliance with the above requisites (such as the requirements that it be issued to individual citizen or resident alien or non-resident alien engaged in trade or business within the Philippines only and that it must be in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts or other forms which must be prescribed by the Bangko Sentral ng Pilipinas); otherwise, a final tax of twenty percent (20%) shall be imposed, or, if the investment or deposit is pre-terminated before maturity, the interest income shall be subject to the final withholding tax which shall be deducted and withheld from the proceeds of said investment and which shall be computed in accordance with the pre-termination rate schedule under Sections 24(13)(1) and 25 (A)(2) of the Tax Code. Finally, for monitoring purposes, the bank shall set up a separate numbering system in its trust books for its long-term products. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group