BIR Ruling [DA-064-02]

April 03, 2002 BIR RULING [DA-064-02] 24 (B) (1); 063-2000 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 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 in the form of common trust fund known as the Metrofund Extra, pursuant to the memorandum of the Monetary Board dated January 13, 2000. It appears that the Declaration of Trust and Trust Participation Agreement of your bank's new long term Common Trust Fund (CTF) known as the "Metrofund Extra" has been duly approved as substantially complying with the Rules and Regulations on Trust, Other Fiduciary Business, and Investment Management Activities provided under the Manual of Regulations for Banks, by the Bangko Sentral ng Pilipinas dated April 3, 2001; that the purpose of the CTF is to pool peso-denominated funds of Participants or Investors to provide the latter access to higher yielding investment instruments, investment diversification, and higher yield potential due to the benefits of tax exemption; that the CTF shall be administered and maintained exclusively for the collective investment and reinvestment of funds in investment outlets which are not commonly available to the Participants or Investors; that the Trustee-bank may on any business day, accept moneys from the Participants as Participations in the Fund of the basis of the Offer Price as of the date such Participation is admitted and upon admission or acceptance of moneys as Participation in the Fund, the Trustee-bank shall issue a Confirmation of Participation in favor of the Participant; that the Trustee-bank shall have exclusive management, administration, operation and control of the Fund, as well as the full power and authority on the matter of investment and reinvestment of the same; that the discretion of the Trustee-bank is limited by the terms and conditions of the Declaration of Trust; that the beneficial ownership of the trust fund remains with the individual Participants; that the remuneration of the Trustee-bank shall be limited to trust fees; and that the application for exemption of Metrobank is made in connection with the Memorandum dated January 3, 2000 issued by the Bangko Sentral ng Pilipinas to all banks performing trust, other fiduciary business and investment management activities, amending for this purpose Monetary Board Resolution No. 1748 to include long-term investment certificates in the form of common trust funds, individual trust and investment management accounts that may qualify for tax exemption under Section 24(B)(1) of the Tax Code of 1997. In reply thereto, please be informed that Section 24(B)(1) of the Tax Code of 1997 provides that a final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; . . . : Provided, further, That interest income from long term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax. Provided, finally, That should the holder of the certificate preterminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: "Four (4) years to less than five (5) years 5% Three (3) years to less than four (4) years 12%; and Less than three (3) years 20% Under Section 2 of the Memorandum to All Banks Performing Trust, Other Fiduciary Business and Investment Management Activities, dated January 3, 2000, the following shall be the features/requirements of CTF's which may qualify for exemption from the 20% final tax under Section 24(B)(1) of the 1997 Tax Code: "a. The tax exemption shall apply to CTF's established on or after the effective date of this Memorandum; "b. The CTF indenture or plan as well as evidences of participation shall clearly indicate that participants shall be limited to individual trustor/investor who are Filipino citizens or resident aliens and that participation is non-negotiable and non-transferable; "c. The date of contributions to the CTF shall be clearly indicated in the evidence of participation to serve as basis for the trustee-bank to determine the period of participation for tax exemption purposes; "d. The CTF indenture/plan as well as the evidence of participation shall indicate that pursuant to Section 24(B)(1) of R.A. 8424, interest income of the CTF derived from investments in interest-bearing instruments (e.g. time deposits, government securities, loans and other debt instruments) which are otherwise subject to the 20% final tax shall be exempt from said final tax provided participation in the CTF is for a period of at least five (5) years. If participation is for a period less than five (5) years, interest income shall be subject to a final tax which shall be deducted and withheld based on the following schedule Participation Period Rate of Tax Four (4) years to less than five (5) years 5% Three (3) years to less than four (4) years 12% Less than three years 20% "Necessarily, the date of contribution shall be clearly indicated in the evidence of participation which shall serve as basis for determining the participation period of each participant; and "xxx xxx xxx" It appears that the Common Trust Fund (CTF) created by the Metropolitan Bank and Trust Company known as the "Metrofund Extra" conforms with the features of CTF's which may qualify for exemption from the 20% final withholding tax under Sections 24(B)(1) and 25(A)(2) of the Tax Code. Such being the case, the interest income derived by individual citizens, individual resident aliens and non-resident alien individuals engaged in trade or business within the Philippines from the 5-year Long-Term Common Trust Fund established by Metropolitan Bank and Trust Company shall be exempt from the final withholding tax of 20% imposed under Sections 24(B)(1) and 25(A)(2), both of the Tax Code of 1997. Consequently, the interest income derived by the Metrobank Common Trust Fund is also exempt from such final withholding tax provided that the fund was held by the trustee-bank for at least five (5) years. However, if the participation is for a period of less than 5 years, the interest income shall be subject to a 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 Secs. 24(B)(1) and 25(A)(2) of the Code. ( BIR Ruling No. 063-2000 dated November 20, 2000 ) 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