BPI Asset Management

May 20, 2009 BIR RULING [DA-(FIT-006) 240-09] 24 (B) (1); DA-064-02, DA-(FIT-004)117-2009 BPI Asset Management 17/F BPI Building, Ayala Avenue corner Paseo de Roxas Makati City Attention: Ms. Cynthia S. Makasiar Vice President Mr. Dominador C. Mauhay III Assistant Manager Gentlemen : This refers to your letter dated April 29, 2009 requesting for confirmation of your opinion that the interest income earned by an individual when investing in Long-term Living Trust (LLT) and/or Long-Term Investment Management Account (LIMA) for a period of at least five (5) years is exempt from income tax, and consequently not subject to withholding tax, particularly the 20% final withholding tax and the 2% creditable withholding tax, regardless of the term of the underlying instruments in which the fund is subsequently invested into. It is represented that Bank of the Philippine Islands (BPI) is a domestic banking corporation duly registered and licensed in accordance with the laws of the Republic of the Philippines and is authorized to engage in trust and other fiduciary business. Pursuant to said authority, BPI through its Asset Management and Trust Group (BPI Trust), offers to its clients LLT, a revocable living trust agreement, and LIMA in accordance with the purpose and intent of long-term individual trusts and investment management accounts Sections 24 (B) (1) and 25 (A) (2) of the National Internal Revenue Code of 1997 (Tax Code) and the implementing Memorandum issued by the Bangko Sentral ng Pilipinas. Upon signing of the LLT, the individual trustor assigns, transfers and delivers to BPI, as the trustee, a specific amount of money referred to as "trust fund". The trustor may also deliver to the trustee additional funds from time to time. By virtue of the living trust agreement, the trustee shall hold, manage, administer, invest and re-invest the trust funds in accordance with the terms and conditions contained in the LLT agreement. The relationship of the bank with that of its client is a trustor-trustee relationship. Similarly, under the LIMA, the principal assigns, transfers and delivers to BPI, as the investment manager, a specific amount of money or "fund". The principal may also deliver to the investment manager additional funds from time to time. By virtue of the investment management agreement, the investment manager, is conferred certain powers to manage, invest and reinvest such funds. These funds, as well as proceeds, interest, dividends, profits and income realized from the management, investment and re-investment thereof shall constitute the managed funds referred to as "fund". Legal title to all the funds and properties in the Portfolio shall be retained with the principal. The relationship of the bank with that of its client is that of a principal-agent relationship. EcSaHA In both the LLT and LIMA, the bank shall invest and re-invest the fund in any instruments, which may include deposits, loans, notes, bonds, and other similar instruments. These underlying instruments have tenors which may be less than 5 years. 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 Nov. 20, 2000; BIR Ruling No. 3-05 dated July 22, 2005) Section 22 (FF) of the Tax Code of 1997 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 thousand pesos (P10,000) and other denominations 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 Subsections: Provided finally, That should the holder of the certificate preterminate 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 and from the 2% expanded withholding tax under Sec. 2.57.2 (M) of Revenue Regulation 2-98, as amended, regardless of the form of the underlying instrument. IHCSTE 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 would subject the said entire 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 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