BIR Ruling [DA-446-06]

July 21, 2006 BIR RULING [DA-446-06] Sec. 24 (B) (1); R.R. 17-2003; DA-201-04 Land Bank of The Philippines 1598 M.H. Del Pilar Cor. Dr. Quintos Malate, Manila Attention: Atty. Reynauld R. Villafuerte Vice President Gentlemen : This refers to your letter dated February 2, 2005 requesting for confirmation of your opinion that the interest payments made by top ten thousand (10,000) corporations for their loans funded by the Land Bank of the Philippines-Trust Banking Group (LBP-Trust) are no longer subject to the 2% creditable withholding tax (CWT) prescribed under Section 2.57.2 (M) of Revenue Regulations (RR) No. 17-2003, amending RR No. 2-98, in accordance with BIR Ruling No. DA-201-2004. The facts of the case as represented are as follows: 1) A department in Land Bank of the Philippines (LBP) called Investment and Trading Department, under LBP-Trust, offers various trust products to its clients/trustors, with LBP as the trustee; 2) Legal title to the funds belongs to LBP-Trust; while beneficial title thereto pertains to the clients/trustors; 3) LBP-Trust invests the funds in various investment portfolio, among which are by extending loans to top ten thousand private corporations; 4) The loans are evidenced by promissory notes in favor of LBP-Trust for various funders, and the interest payments therefrom are made to LBP-Trust; 5) LBP-Trust, in turn, credits the interest payments to the trust accounts which funded the loans; and withholds a final tax on the interest payments based on the rate required for interest income of the trust funds upon release of the funds or interest thereof to clients/trustors, pursuant to Sections 24(B)(1) and 27(D)(1) of the Tax Code of 1997, as the case may be. The interest payments made by the top ten thousand private corporations are not income of LBP-Trust but of the funders of the loans. LBP-Trust is entitled merely to compensation for its services as the trustee, at pre-agreed trust fees paid by the clients/trustors. In reply, please be informed that this Office in BIR Ruling No. DA-201-2004 dated April 12, 2004 ruled that interest payments made by the top ten thousand corporations for their loans funded by a bank's trust department, 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. The said interest payments are not considered income payments to the bank's trust department but to the clients/trustors, notwithstanding that the bank's trust department holds legal title to the funds. This is so because the beneficial title over the funds remains with the clients/trustors. It is for this reason that the interest paid by the bank's trust department to its clients/trustors is subject to the 20% final withholding tax. Considering that 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, the interest payments made by the top ten thousand corporations, which redound to the benefit of the payee who are the clients/trustors, shall no longer be subjected to another round of withholding tax as these interest payments are actually part of the income of the clients/trustors which are already subjected to the 20% final withholding tax as prescribed in Sections 24(B)(1) and 27(D)(1) of the Tax Code of 1997. Based on the foregoing, this Office confirms your opinion that the interest payments made by the top ten thousand corporations in favor of LBP-Trust is no longer subject to the 2% withholding tax prescribed in Section 2.57.2(M) of Revenue Regulations No. 17-2003, amending Revenue Regulations No. 2-98. aTcSID 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service