Punongbayan & Araullo

May 20, 2009 BIR RULING [DA-(FIT-007) 241-09] 24 (B) (1); DA-064-02, DA-(FIT-004) 117-09 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated March 31, 2009 requesting on behalf of your Client, Standard Chartered Bank (Philippine Branch) Trust and Local Custody Department (SCB-Trust) for confirmation of your opinion that the interest income earned by an individual from its long-term directional living trust and/or long term directional investment management account opened with SCB-Trust where the investments are made in allowable investment outlets per Subsections 409.8 and 411.9 of Part IV Manual of Regulations for Banks (MORB) for a period of at least five (5) years is exempt from income tax. It is represented that Standard Chartered Bank (Philippine Branch) Trust and Local Custody Department (SCB-Trust) is a foreign 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, SCB through its Trust and Local Custody Department ("SCB Trust"), is offering to its clients the establishment of Long-Term Tax Exempt Directional Living Trust Agreement (LT-TE DLTA) and Long Term Tax Exempt Directional Investment Management Agreement (LT-TE DIMA) in accordance with the purpose and intent of 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. The funds are created upon the execution of the LT-TE DLTA and LT-TE DIMA between the individuals and SCB-Trust, and takes effect from the date of signing thereof. It shall continue to be in full force and effect until terminated by either party by giving a written notice to the other at least thirty (30) calendar days prior to the intended termination date. Under the LT-TE DLTA, the individual trustor assigns, transfers and delivers to SCB, as the trustee, a minimum investment amount of Five Hundred and Five Thousand Pesos (P505,000.00). By virtue of the LT-TE DLTA, the trustee shall hold, manage, administer, invest, re-invest the trust funds, collect, claim and receive as appropriate, dividends, interest, earnings and other income or profits of the trust and disburse or distribute such amount during the trustor's lifetime or upon the trustor's death. Such amount as well as any other cash, properties, securities and other assets that may be added to, which accrue to, or are earned by the trust shall constitute the "Trust Estate" and shall be maintained exclusively for the trust and kept by the trustee as an independent and separate account from all other trust accounts. Under the LT-TE DLTA, the individual trustor unqualifiedly warrants that it will maintain the Trust Estate effective for a period of at least five (5) years. The same may, however, be revoked upon written instructions by the trustor. SIcEHC Similarly, under the LT-TE DIMA, the principal assigns, transfers and delivers to SCB-Trust, as the investment manager/agent, the minimum investment amount of One Million Pesos (1,000,000.00). 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, shall be conferred certain powers, upon written instruction of the principal, to manage and invest and reinvest such funds. These funds, as well as the proceeds, interest, dividends, and income or profits realized from the management, investment and reinvestment thereof shall be designated as the "Investment Management Account'' or "Portfolio". Legal title to all the funds and properties in the Portfolio shall be retained by the principal. Under the LT-TE DIMA, the principal unqualifiedly warrants that the Investment Management Account shall remain effective for a period of at least five (5) years. In both the LT-TE DLTA and LT-TE DIMA, SCB-Trust shall invest the funds in interestbearing instruments ( e.g., time deposits, government securities, loans and other debt instruments, such as bonds, notes) and other financial instruments which has, likewise, a term of at least 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: ICAcTa 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. 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