Development Bank of the Philippines

June 22, 2009 BIR RULING [DA-(FIT-011) 313-09] 24 (B) (1); DA-012-02 Development Bank of the Philippines Trust Services Sen. Gil. J. Puyat Avenue Makati City Attention: Ms. Roda T. Celis Trust Officer Gentlemen : This refers to your letter dated March 4, 2009 requesting for tax exemption on your Investment Management Account package pursuant to Section 24 (B) (1) of the Tax Code. HIAESC It is represented that the DEVELOPMENT BANK OF THE PHILIPPINES (DBP) renders services relative to the management and investment of its clients' investible funds, subject to the terms and conditions stipulated in the agreement. In reply, please be informed as follows: 1. No separate taxable entity is created in an Investment Management Account and interest income arising therefrom may be exempt from the 20% final withholding tax, subject to the conditions under Sections 22 (FF) and 24 (B) (1) of the Tax Code of 1997. HDTSIE An Investment Management Account (IMA) involves an agreement primarily for financial return whereby the bank (investment manager) binds itself to handle or manage investible funds or any investment portfolio in a representative capacity as financial or managing agent, adviser, consultant or administrator of financial or investment management, advisory, consultancy or any similar arrangement which does not create or result in a trusteeship but rather a principal-agent relationship. The instruments into which the funds are invested are in the name of the principal or investment manager as agent for the principal. Commingling of funds is not allowed which explains a higher minimum amount. (BIR Ruling No. 030-01 dated July 24, 2001) Clearly, no separate taxable entity is created in entering into an IMA since, in contrast to Common Trust Funds (CTFs), Individual Trust Accounts (ITAs), funds are invested in the name of the principal or investment manager as agent for the principal and are not commingled with other trust accounts. Individual investment by virtue of an IMA may, therefore, be exempted from the 20% final withholding tax on interest, subject to the fulfillment of conditions under Sections 22 (FF) and 24 (B) (1) of the said Code. HAaScT 2. Only interest income may be exempt under Section 24 (B) (1) and Section 25 (A) (2), ibid. It must be emphasized, however, that only interest or discount income from investments by the individual management account shall be entitled to exemption. This is so because Section 24 (B) (1) and Section 25 (A) (2) of the Tax Code of 1997 only refer to exemption of the individual from interest income. Consequently, an individual management account, shall be subject to tax under the applicable provisions of the Tax Code on income other than interest income. For instance, the individual management account will be subject to the applicable income tax on gain from sale of the government securities, the 5%/10% or 1/2 of 1% tax on sale of shares of stocks, documentary stamp taxes, and to the 10% withholding tax on dividends, when investments made by the Fund give rise to the same. Such net gain or net dividends (that is, net of the said 5%/10% capital gains tax, documentary stamp tax or the withholding tax on dividends) will no longer be subject to the 20% final withholding tax when it is distributed to the investor in the investment management account. CSaHDT While it has been held that "(t)he trust instrument to be used to generate long-term deposit or investment determines the income tax exemption of the individual investor in the income earned (BIR Ruling 30-2001 dated July 24, 2001)", this has reference to whether such instrument qualifies as a long-term investment or deposit certificate as prescribed by the Bangko Sentral ng Pilipinas, and whether the individual holder complied with the 5-year holding period. Said exemption is not to be considered as attached to the Fund itself, but rather it applies to the income derived by said individual from his investment in such Fund, which is distributed to him by the trustee or manager of the Fund. The 20% final tax or exemption is applicable and pertains only to the interest income that the individual earns from investing his money in the Fund. This is clearly the import of Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997 which similarly provide that a tax at the rate of 20% shall be imposed on interest income "Provided . . ., That interest income 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 this Subsection: 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: aDSHCc "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%." WHEREFORE, in view of the foregoing, the Investment Management Account and interest income arising therefrom may be exempt from the 20% final withholding tax, subject to the conditions under Sections 22 (FF), 24 (B) (1), 25 (A) (2), supra. 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. DHESca Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service