BIR Ruling [DA-201-04]

April 12, 2004 BIR RULING [DA-201-04] 24 (B) (1); Rev. Reg. 17-2003 Banco de Oro Unibank 12 ADB Avenue, Ortigas Center Mandaluyong City Attention: Atty . Cristina Barbara V. Concepcion Senior Manager BDO-Trust Legal and Administrative Unit Gentlemen : This refers to your letter dated February 12, 2004 stating that clients/trustors invest their funds in Banco de Oro-Trust Banking Group's (BDO-Trust) various trust products; that as trustee, BDO-Trust holds legal title to the funds but the clients/trustors retain beneficial title thereto; that as such, BDO-Trust invests said funds in various investment outlets such as loans to the top ten thousand corporations; that the loans are evidenced by promissory notes in favor of BDO-Trust for various funders; that the interest payments from the loans are made to BDO-Trust; that these interest payments are in turn conveyed by BDO-Trust to the concerned trust accounts which funded the loans; that the interest payments are not income of BDO-Trust but of the funders; that as compensation for its services as trustee, BDO-Trust is paid a pre-agreed trust fees by the clients/trustors; that BDO-Trust also withholds final tax on the interest payments based on the rate required for interest income of the concerned trust funds upon release of funds or interest thereof to the clients/trustors pursuant to Section 24(B)(1) and 27(D)(1), as the case may be. In connection therewith, you now request confirmation of your opinion as to whether or not interest payments made by top ten thousand corporations for its loans funder by BDO-Trust, acting as Trustee of various funders, is subject to the 2% creditable withholding tax as prescribed in Section 2.57.2(M) of Revenue Regulations No. 17-2003, amending Revenue Regulations No. 2-98. In reply thereto, please be informed that Section 2.57.2(M) of Revenue Regulations No. 17-2003, amending Revenue Regulations No. 2-98, which provided that "(M) Income payments made by the top ten thousand (10,000) private corporations to their local resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax . Income payments made by any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, to their local/resident supplier of goods and local/resident supplier of services, including non-resident alien engaged in trade or business in the Philippines Supplier of goods One percent (1%) Supplier of services Two percent (2%) "xxx xxx xxx" Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sections 51 and 41 of the Tax Code of 1997, to report the income and/or pay the difference between the tax withheld and the tax due on the income. ( Section 2 . 57(B), Revenue Regulations No . 2-98, as amended ) On the other hand, under the final withholding tax system, the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. In the instant case, the interest payments made by the top ten thousand corporations are already covered by other rates of withholding tax which is the 20% final withholding tax as prescribed in Sections 24(B)(1) and 27(D)(1) of the Tax Code of 1997. Thus, the subject interest payments are not income payments to BDO-Trust but to the clients/trustors, notwithstanding that BDO-Trust holds legal title to the funds, but the beneficial title remains with the clients/trustors. It is for this reason that the interest paid by BDO-Trust to its clients/trustors is already subject to the 20% final withholding tax. SUCH BEING THE CASE, the interest payments made by the top ten thousand corporations for its loans funded by BDO-Trust, acting as trustee of various funders, is no longer subject to the 2% creditable withholding tax prescribed in Section 2.57.2(M) of Revenue Regulations No. 17-2003, amending Revenue Regulations No. 2-98. DSETcC 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group