Valenton & Danganan Law Offices

July 2, 2009 BIR RULING [DA-(FIT-012) 337-09] 24 (B) (1); DA-064-02, DA-(FIT-04)117-09 Valenton & Danganan Law Offices Suite 1006 Annapolis Wilshire Plaza 11 Annapolis, Greenhills San Juan, Metro Manila Attention: Atty. Jord Jharoah B. Valenton Gentlemen : This refers to your letter dated February 25, 2009 requesting in behalf of your client, Export and Industry Bank-Trust Banking Group for confirmation of your opinion that the interest income derived from bonds or securities, with maturities of not less than five 5 years, that shall be procured using funds received by your client under a Living Trust Agreements (LTA) and Investment Management Agreements (IMA), which have a holding period of not less than five (5) years, shall be exempt from the 20% final withholding tax under Section 24 (B) (1) or Section 25 (B) (2) of the Tax Code. The features common to all of the long term accounts are: (a) Only individuals, who are either who are Filipino citizens, resident aliens, or non-resident aliens engaged in trade or business in the Philippines are eligible to invest under the IMA or LTA; (b) The LTA and IMA are issued in such forms as prescribed by the Bangko Sentral ng Pilipinas; (c) The investments are in denominations as likewise prescribed by the BSP; (d) The LTA and the IMA have holding periods of not less than five (5) years; (e) Both the LTA and the IMA provide that interest income of said investment management accounts in interest-bearing instruments shall be exempt from 20% final tax, unless the LTA or IMA is preterminated, in which case said interest income shall be subjected in accordance with Section 24 (B) (1) and 25 (A) (2) of the Tax Code to a final tax which shall be deducted and withheld based on the following schedule: Holding Period Applicable to 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 investment is non-negotiable and non-transferable; (g) The date of investment is indicated to determine the required compliance period. 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. CaHAcT 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. HDTSCc 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