BDO Private Bank, Inc.

May 25, 2009 BIR RULING [DA-(FIT-008) 249-09] 24 (B) (1); DA-064-02, DA (FIT-004) 117-2009 BDO Private Bank, Inc. 27F Ayala Tower 1, Ayala Triangle, Ayala Avenue Makati City Attention: Atty. Clarissa M. Pealosa VP-Head Trust Legal and Compliance Unit Atty. Federico P. Tancongco VP-Legal and Compliance Unit and Atty. Apolonio C. Juan II VP-Legal and Compliance Unit Gentlemen : This refers to your letter dated December 24, 2008 requesting for confirmation of your opinion that the interest income derived from long term individual trust and individual management accounts of Banco de Oro Private Bank, Inc. is exempt from the payment of the 20% final tax imposed under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997. These accounts are marketed and denominated as Professional Pension Trust, Special Education Trust, Revertible Wealth Trust, Long Term Investment Living Trust, and Long Term Investment Management Account and locked up with the bank for a period of not less than five (5) years. The features common to all of the long term accounts are: (a) Eligible investors are limited to individuals who are Filipino citizens or resident aliens; (b) The underlying agreements are non-negotiable and non-transferable; (c) The amounts contributed are to be held in trust for at least five (5) years; (d) Income, but not principal, may be withdrawn by or paid to the client or his her beneficiary/ies, during the five (5) year holding period; (e) If principal is withdrawn within the 5 year holding period, interest income shall be subject to final withholding tax at the rates specified under Sections 24 (B) (1) and 25 (A) (2) of the Tax depending on the holding period, to wit: Holding Period Applicable Tax Rate Four (4) years to less than five (5) years 5% Three (3) years to less than four (4) years 12% Less than three (3) years 20% (f) The funds will be invested in long term (more than 5 years) and/or short-term (5 year or less) interest earning instruments or investments outlets; AHSaTI (g) The underlying agreement comply with BSP's requirements for long term trust and investment management accounts under Monetary Board Resolution No. 1748, December 10, 1999. 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. THcaDA 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.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group