BIR Ruling [DA-144-02]

September 3, 2002 BIR RULING [DA-144-02] 24 (B) (1); 063-2000 Asia United Bank G/F Morning Star Building 347 Senator Gil Puyat Avenue Makati City Attention: Mr. Andrew A. Chua AVP/Trust Officer Gentlemen : This refers to your letter dated April 3, 2000 requesting for a ruling which shall allow your Revocable Living Trust Agreement wherein a copy of which is attached, to avail of the exemption under Section 24(B)(1) of the Tax Code of 1997. It appears that the Asia United Bank (AUB) Revocable Living Trust Agreement is a common trust fund (CTF) established and administered by the Asia United Bank through its Trust and Investments Group; that the participation of the individual investors shall be held under the conditions provided in Section 24(B)(1) of the Tax Code of 1997; that the AUB as trustee shall receive, retain, and dispose as part of the corpus of this trust, any additional property of any kind which the trustor or any other person may hereinafter assign, transfer, set over, or deliver to the trustee with instructions to hold, manage, and dispose of the same in accordance with the terms of the agreement; that the trustee may invest and reinvest the principal and income of the trust estate as a single trust estate without distinction between principal and income, in any property, real and personal, or any part therein, wherever situated, beyond those of the character and to those amounts and proportions required and fixed by law for fiduciaries; that the trustee is authorized to combine in whole or in part of the trust estate, with any other funds in the custody of the trustee, provided that the trust estate and investment thereof are identifiable at all times, and provided further, that the funds or property of the trust estate shall be accounted separately and distinctly from these other clients; that the AUB's application for a certificate of tax exemption is made in connection with Section 5 of the Memorandum dated January 3, 2000 issued by the Bangko Sentral ng Pilipinas (BSP) to all banks performing trust, other fiduciary business and investment management activities, amending for this purpose Monetary Board Resolution No. 1748 dated December 10, 1999 to include long term investment certificates in the form of common trust funds (CTF), individual trust and investment management accounts that may qualify for tax exemption under 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 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 imposed under this subsection: Provided, finally, that should the holder of the certificate pre-terminate 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 the CTFs 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 established on or after the effective date of this Memorandum; "b. The CTF indenture or plan as well as evidence of participation shall clearly indicate that the participants shall be limited to individual trustors/investors 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 (3) 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 participants; and . . ." It appears that the Revocable Living Trust Agreement is a common trust fund established by the AUB that conforms to the features of CTFs which may qualify for exemption from the 20% final withholding tax under Section 24(B)(1) and 25(A)(2) of the 1997 Tax Code. Such being the case, interest income derived by individual citizens and individual resident aliens from the 5-year Long Term Common Trust Fund established by Asia United Bank through its Trust and Investments Group shall be exempt from the final withholding tax of 20% imposed under Section 24(B)(1) and 25(A)(2), both of the Tax Code of 1997. Consequently, the interest income derived by the Asia United Bank 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 for a period 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. Finally, for monitoring purposes, the bank shall set up a separate monitoring system in its trust books for its long-term products. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different from that as represented, 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 Service