United Coconut Planters Bank

February 23, 2009 BIR RULING [DA-(FIT-004) 117-09] BIR Ruling No. 101-98; BIR Ruling No. 3-05 United Coconut Planters Bank UCPB Building 7907 Makati Avenue Makati City 1200 Attention: Ma. Catalina M. Cruz AVP Head Trust Sales Department and Ma. Victoria C. Mendoza AVP Head Investment Evaluation & Special Trust Fund Gentlemen : This refers to your letter dated February 20, 2009 requesting for clarification on whether or not the interest income to be derived by your clients under your proposed Long Term Trust Account (LT-TA) and Long Term Investment Management Account (LT-IMA) is exempt from the payment of income tax provided for under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997, as amended. IcEaST It is represented that your proposed LT-TA and LT-IMA shall have the following features: 1. The principal investment shall have a holding period of at least five (5) years. This means that the client will have to agree not to withdraw his principal investment from the LT-TA or LT-IMA for at least five (5) years from the date of opening. 2. The investment shall be in denominations of Ten Thousand Pesos (P10,000.00) or other denomination as may be prescribed by the Bangko Sentral ng Pilipinas; 3. The investor shall be an individual who is a Filipino citizen, or a resident alien of the Philippines, or a non-resident alien engaged in trade or business within the Philippines; 4. The LT-TA and LT-IMA agreements will have the following provisions: "Pursuant to Sections 24(B)(1) and 25(A)(2) of the NIRC, it is understood that the interest income derived from this LT-TA (or LT-IMA, as the case may be) shall be exempt from the twenty percent (20%) final tax provided that should the client pre-terminate this LT-TA (or LT-IMA as the case may be) before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the Bank from the proceeds of the LT-TA (or LT-IMA as the case may be) 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%" In reply, please be informed that this Office has, on several occasions, ruled that interest income derived by individual citizens and individual resident aliens, as well as non-resident aliens engaged in trade or business in the Philippines 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 imposed under Sections 24 (B) (1) and 25 (A) (2), both of the Tax Code, as amended. (BIR Ruling No. 101-98 dated June 29, 1998; BIR Ruling No. 63-00 dated on Nov. 20, 2000; BIR Ruling No. 3-05 dated July 22, 2005) ICHAaT Section 22 (FF) of the Tax Code, as amended, defines the term "long-term deposit or investment certificate" as follows: "The term 'long-term deposit or investment certificate' shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years , the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by non-bank financial intermediaries and finance companies) to individuals in denominations of Ten thousands pesos (P10,000) and other denominations as may be prescribed by the BSP." In relation to this, Sections 24 (B) (1) and 25 (A) (2), both of the Tax Code, as amended, provide that interest income derived by individual citizens and individual resident aliens, as well as non-resident aliens engaged in trade or business in the Philippines, 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 imposed under these Subsections: 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% In view thereof, and considering that your proposed Long Term Trust Account (LT-TA) and Long Term Investment Management Account (LT-IMA) as described above are in full compliance with the requisites of "long-term deposit or investment certificate" as defined under Section 22 (FF) of the Tax Code, as amended, the interest income to be derived therein by your INDIVIDUAL clients, who are Filipino citizens, resident aliens, as well as non-resident aliens engaged in trade or business within the Philippines, shall be exempt from the 20% final withholding tax under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997, as amended. cHDaEI A meticulous study of the above-cited section disclosed further that there is nothing which would prohibit your INDIVIDUAL clients who are holders of the certificates to pre-terminate the deposit or investment before the fifth (5th) year period. However, the withdrawal of the principal deposit/investment before the 5th year would subject the said entire interest earnings to a final withholding tax depending on the holding period of the instrument as stated above. Finally, for better monitoring purposes, the bank shall have to set up a separate numbering system in its books for these proposed Long Term Trust Accounts (LT-TA) and Long Term Investment Management Accounts (LT-IMA) you will now be offering to your individual clients. This ruling is issued on the basis of the facts as represented. However, if it shall be disclosed upon investigation that the actual facts are different, then this ruling shall be without force and effect. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue