BIR Ruling [DA-174-06]

March 27, 2006 BIR RULING [DA-174-06] 32 (B) (7) (h); 014-05 Salvador Guevara & Associates 815-816, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Atty. Euney Marie J. Mata-Perez Gentlemen : This refers to your letter dated January 4, 2006 stating that your clients, Sun Life Prosperity Dollar Advantage Funds and Sun Life Prosperity Dollar Abundance Funds (Sun Life Funds) are domestic mutual funds companies; that they intend to invest in, or buy shares or units of, foreign open-end mutual fund companies domiciled abroad, which companies may include MFS Meridian Funds (SICAV), an open-end foreign mutual fund based in the U.S.; that the shares or units in the foreign open-end mutual fund may be redeemed at anytime; and that at the time of redemption, the Sun Life Funds will be entitled to payment in such amount equivalent to the present Net Asset Value (NAV) of such shares or units. In connection therewith, you now request confirmation of your opinion that the gains derived by the Sun Life Funds from the redemption of their shares or units in foreign open-end mutual fund companies are not subject to tax under Section 32(B)(7)(h) of the Tax Code of 1997. In reply thereto, please be informed that Section 32(B)(7)(h) of the Tax Code of 1997 provides that "Sec. 32. Gross Income . (A) . . . (B) Exclusion from gross income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (7) Miscellaneous Items. (a) . . . ; (h) Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22(BB) of the Tax Code. Corollarily, Section 22(B), supra defines the term "mutual fund company" to mean an open-end and close-end investment company as defined under the Investment Company Act. Under Section 5(1) of R.A. No. 2969, otherwise known as the Investment Company Act, an open-end investment company is defined as follows: HESCcA "' Open-end company ' means an investment company which is offering for sale or has outstanding any redeemable security of which it is the issuer." This Office had already the occasion to rule on the matter, when it said in BIR Ruling No. 014-2005 dated August 16, 2005 , that "The Fund is an open-end mutual fund, offering units thereof, as securities, which are redeemable. A unit in the Fund, represents a participant's rights therein, and each unit corresponds to the same percentage of the Fund's assets and may be divided into tenths, hundredths, thousandths, etc. ( The Fund's Management Regulations, Title III, Article 9 ). Units may be redeemed within the deadline provided in the Vivendi Group Plan, or before such deadline in the cases provided by law ( Id at Article 13 ). Thus, the Fund is an open-end investment company as defined under the Investment Company Act. "Under Section 4 of the Investment Company Act, an investment company is incorporated for the primary purpose of investing, reinvesting, or trading in securities. Thus, an investor in an investing company or a mutual fund has two inducements to invest therein: (a) he may expect more expert management of his savings than he could otherwise command; and (b) he can obtain diversification of investment not otherwise available ( Aldred Invest. Trust v. Securities and Exchange Com. 151 F2d 254, cert. Denied 362 US 795, 90 L Ed 483, 66 S Ct 486 ). In this regard, it is important to note that Section 32(B)(7)(h) of the Tax Code of 1997 was introduced to "encourage savings and develop our capital markets" ( Sponsorship Speech of the Rep. Javier, Records of the House of Representatives, 10th Congress, 17 March 1997 ). Exempting any gain on the redemption of units in a mutual fund such as the Fund would be consistent with and would achieve, this avowed objective. "Thus, any gain derived by employees of the Vivendi group from the redemption of units of the Fund is excluded from gross income for income tax purposes under the afore-quoted provisions of the Investment Company Act and the Tax Code." Considering that the above-cited ruling is in all fours similar to the instant case, as when Sun Life Funds intend to invest in foreign mutual fund companies which are open-end and the shares or units of these mutual funds are offered as securities and may be redeemed by the holders thereof at anytime and upon redemption, the holders of these shares or units would be entitled to payment equivalent to the NAV of such shares or units. As such, these funds would be deemed "open-end mutual fund companies" as contemplated in Section 22(BB) of the Tax Code of 1997. WHEREFORE, in view of the foregoing , this Office holds that the ordinary income derived by the Sun Life Funds from the redemption of shares or units in foreign open-end mutual fund companies shall be exempt from tax pursuant to Section 32(B)(7)(h) of the Tax Code of 1997. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service