Philippine National Bank

August 7, 2009 BIR RULING [DA-(FIT-013) 446-09] 24 (B) (1); 063-2000; DA-413-00 Philippine National Bank PNB-Trust Banking Group PNB Financial Center, Pres. Diosdado Macapagal Blvd., Pasay City Attention: Ma. Elena S. Sarmiento First Senior Vice President and Trust Officer Emma C. See First Vice President Head, Portfolio Management and Product Development Division Gentlemen : This refers to your letter dated March 11, 2009 requesting for a ruling as to whether or not the interest income from Living Trust Agreements (LTA)/Investment Management Agreements (IMA) under its product branded as "Zenith" administered by the Philippine National Bank (PNB) through its Trust Banking Group is exempt from the 20% final withholding tax imposed under Section 24 (B) (1) of the Tax Code of 1997. HSIaAT It is represented that Philippine National Bank (PNB) Trust Banking Group is planning to launch a long-term Living Trust Account (LTA)/Investment Management Account (IMA) that will take advantage of the provision under Section 24 (B) (1) of the Tax Code of 1997 if the account is kept for more than five (5) years; that the product will be branded as "Zenith" and will target retirees, OFW/s and parents with minor beneficiaries with a long-term investment horizon; that in the Summary of Product Features, PNB Zenith Account is defined as a long-term living trust account (LTA)/Investment Management Account (IMA) for individuals conceptualized in order to take advantage of the provision under Section 24 (B) (1) R.A. 8424 (The Tax Reform Act of 1997) allowing individual trust accounts to be exempted from the 20% final tax if the account is kept for more than 5 years; and that PNB's application for a certificate of tax exemption is made in connection with Section 5 of the "Memorandum issued by the Bangko Sentral ng Pilipinas (BSP) to all Banks Performing Trust, Other Fiduciary Business and Investment Management Activities" dated January 3, 2000, amending for this purpose Monetary Board Resolution No. 1748 dated December 10, 1999 to include long-term investment certificates in the form of common trust funds (CTFs), individual trust and investment management accounts that may qualify for tax exemption under Section 24 (B) (1) of the Tax Code of 1997; and that in support of this request the following documents were attached: (1) Summary of Proposed Product Features of the PNB Zenith Account; and 2) LTA/IMA templates for the PNB Zenith Account. Revocable Living Trust Agreement (LTA) In reply, please be informed that Section 24 (B) (1) of the Tax Code of 1997 provides that "a final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitute and from trust funds and similar arrangements; . . . : Provided, further, 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 investment evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax, 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: 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%" Investment Management Account (IMA) Under Section 3 of the Memorandum dated January 3, 2000, the following shall be the features/requirements of the investment management accounts which may qualify for exemption from the 20% final tax under Section 24 (B) (1) of the 1997 Tax Code: CTSHDI " X411.9 Tax-exempt individual investment management accounts. The following shall be the features/requirements of investment management accounts of individuals which may be exempted from the 20% final tax under Section 24(B)(1) of R.A. No. 8424 (The Tax Reform Act of 1997): a) The tax exemption shall apply to investment management agreements contracted on or after the effective date of this Memorandum; b) The investment management agreement shall only be between individuals who are Filipino citizens or resident aliens and investment manager-banks. The agreement shall be non-negotiable and non-transferable; c) The minimum amount of investment for an investment management account shall be P1 million; d) The investment management agreement shall indicate that pursuant to Section 24(B)(1) of R.A. No. 8424, interest income of the investment management funds derived from investments in interest-bearing instruments ( e.g., time deposits, government securities, loans and other debt instruments) which are otherwise subject to the 20% final tax shall be exempt from said final tax provided the funds are held under investment management by the investment manager for at least five (5) years. If said funds are held by the investment manager for a period less than five (5) years, interest income shall be subject to a final tax which shall be deducted and withheld from the proceeds of the investment management account based on the following schedule Holding Period Rate of Tax 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%" e) The investment manager may accept additional funds for inclusion in investment management accounts which have been established as tax-exempt under R.A. No. 8424. However, the receipt of additional funds shall be properly documented by indicating that they are part of existing tax-exempt investment management accounts and that the interest income of the additional management funds derived from investments in interest-bearing instruments shall be exempt from the 20% final tax under the same conditions mentioned in the preceding item. The document shall also indicate when the additional funds were received by the investment manager-bank to serve as basis for determining the minimum five (5) year holding period for tax exemption purposes of the additional funds; and f) Tax-exempt investment management accounts established under this Subsection shall be subject to the provisions of Subsecs. X411.1(b) and X411.2 up to X411.8." It appears that the IMA established by PNB through its Trust Banking Group conforms to the features of IMAs which may qualify for exemption from the 20% final withholding tax under Section 24 (B) (1) and 25 (A) (2) of the 1997 Tax Code. Such being the case, interest income derived by individual depositors, whether resident citizens, resident alien or non-resident alien individuals engaged in trade or business in the Philippines, with the only exception of alien individual not engaged in trade or business within the Philippines, from the LTA and IMA established by PNB through its Trust Banking Group, shall be exempt from the final tax of 20% imposed under Section 24 (B) (1) of the Tax Code of 1997 provided, however, that if a participant therein pre-terminates his long term investment before 5 years from date of the effectivity of the agreement, PNB, as Trustee, shall withhold and deduct from the proceeds of said investment a final tax on the interest income thereon which shall be computed in accordance with the above-mention schedule. Finally, for monitoring purposes, the bank shall set up a separate numbering system in its trust books for its long-term products. aIcSED 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