Security Bank Corporation

November 27, 2008 BIR RULING [DA-(FIT-014) 467-08] Sections 24 (B) (1), 27 (D) (1), & 28 (B) (7) (a); BIR Ruling No. 103-99 Security Bank Corporation Security Bank Centre 6776 Ayala Avenue Makati City Attention: Mr. Wilfredo S. Talastas FVP and Trust Officer-Trust Division Gentlemen : This refers to your letter dated August 21, 2008 requesting for confirmation of your opinion that the interest or yield from trust accounts or investment management accounts (IMA) managed by Security Bank Corporation's ("Security Bank" or "the Bank" for brevity) FCDU trust department for the benefit of individual citizens, resident aliens, domestic corporations and resident foreign corporations is subject to the final withholding tax of 7.5% imposed under Sections 24 (B) (1), 27 (D) (1) and 28 (B) (7) (a) of the Tax Code. AICTcE As represented, Security Bank is a corporation organized and existing under the laws of the Republic of the Philippines duly licensed by the Bangko Sentral ng Pilipinas (BSP) to engage in banking and trust operations. It is likewise authorized to operate a foreign currency deposit unit (FCDU) under the expanded foreign currency deposit system. The Bank maintains a FCDU Trust Department that accepts foreign currency under trust accounts as well as IMA with the end in view of generating income for its customers through the investment of such funds in any of the foreign currency transactions with residents and nonresidents allowed under applicable BSP rules. A trust account may be revocable or irrevocable and involves the creation of a trust relationship where the bank is appointed as trustee by a trustor for the administration, holding, management of funds and/or properties of the trustor by the trustee for the use, benefit or advantage of the trustor or of others called beneficiaries. Legal title is with the trustee but the beneficial ownership is maintained with the trustor and/or beneficiaries. 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. In reply, please be informed that the term "foreign currency deposit system" and foreign currency deposit unit" are defined under Section 2.22 of Revenue Regulations (RR) No. 10-98, in relation to Republic Act (R.A.) No. 6426, as follows: "(A) Foreign Currency Deposit System shall refer to the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming part of the Philippine international reserves, in accordance with the provisions of Republic Act No. 6 42 6 entitled 'An A c t Instituting a Foreign Currency Deposit System in the Philippines, and For Other Purposes.' AEcIaH (B) Foreign Currency Deposit Unit (FCDU) shall refer to that unit of a local bank or of a local branch of a foreign bank authorized by the Bangko Sentral Ng Pilipinas (BSP) to engage in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6 42 6, as amended ('Local Bank' shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. 'Local branch of a foreign bank' shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended)." Under R.A. No. 6426, as amended, the authority of depository banks under the expanded foreign currency deposit system to accept deposits expressly includes the authority to accept foreign currency in trust. Section 3 of R.A. No. 6426 provides: "SEC. 3. Authority of Banks to Accept Foreign Currency Deposits. The banks designated by the Central Bank under Section two hereof shall have the authority: (1) To accept deposits and to accept foreign currencies in trust; Provided, That numbered accounts for recording and servicing of said deposits shall be allowed; (2) To issue certificates to evidence such deposits; (3) To discount said certificates; (4) To accept said deposits as collateral for loans subject to such rules and regulations as may be promulgated by the Central Bank from time to time; and (5) To pay interest in foreign currency on such deposits." Pursuant to Sections 24 (B) (1), 27 (D) (1) and 28 (B) (7) (a), respectively, of the National Internal Revenue Code (NIRC), as amended, and as clarified in Revenue Memorandum Circular (RMC) No. 1-98, interest income earned from depository banks under the expanded foreign currency deposit system by citizens of the Philippines, resident aliens, domestic corporations, and resident foreign corporations (previously exempt from income tax) are now subject to a final withholding income tax at the rate of 7.5% based on gross income. Thus, Section 24 (B) (1) of the NIRC provides, viz. : "(1) Interests, Royalties, Prizes, and Other Winnings. 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 substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7-1/2%) of such interest income : . . ." Section 27 (D) (1) of the same Code states: "(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7-1/2%) of such interest income . Section 28 (B) (7) (a) of the NIRC states: "(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7-1/2%) of such interest income. " A bank duly authorized by BSP to operate under the foreign currency deposit system, is mandated by Section 57 (A) of the NIRC in relation to RR No. 2-98, as amended, to withhold the final income tax due on the interest income derived by resident clients from their FCDU deposit accounts at the rate of 7.5% as prescribed by Sections 24 (B) (1), 27 (D) (1) and 28 (B) (7) (a) of the NIRC, as amended. Since Security Bank is authorized by BSP to operate under the foreign currency deposit system, this Office hereby confirms your opinion that the interest or yield earned by the individual citizens, resident aliens, domestic corporations and resident foreign corporations from FCDU trust accounts and investment management accounts (IMA) managed by the Bank are subject to a final withholding income tax of 7.5% pursuant to the above provisions of the NIRC. For tax purposes, the yield from IMA is treated in the same manner as the yield from trust accounts. 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. EcHAaS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service