Banco de Oro Unibank, Inc.

September 4, 2009 BIR RULING [DA-(FIT-015) 490-09] 24 (B) (1), 22 (FF) & 25 (A) (2); DA-527-07; 031-01; DA-064-02; DA-413-00; & 063-2000 Banco de Oro Unibank, Inc. Trust and Investment Group Makati City Attention: Atty. Cristina Barbara V. Concepcion Senior Asst. Vice President Gentlemen : This refers to your letter dated August 24, 2009, requesting confirmation of your opinion that interest income derived by Premium Growth Fund (PGF), a long term common trust fund, from its investments in interest-bearing instruments like time deposits, loans, debt instruments and government securities, such as fixed rate treasury notes and bonds with terms of five (5) years and above, is exempt from income tax under Section 24 (B) (1) of the Tax Code of 1997, as amended, and consequently, from the 20% final withholding tax imposed under Revenue Regulations No. 2-98, as amended; otherwise, if the investor withdraws his funds before the fifth year, the interest income of the funds shall be subject to the a final tax which shall be deducted and withheld from the proceeds of the PGF based on the schedule provided under the said section. aAEIHC The facts as represented are as follows: Banco de Oro Unibank, Inc. is a universal bank organized and existing under Philippines laws. The Bank, through its Trust and Investments Group (BDO-Trust), is duly authorized by the Bangko Sentral ng Pilipinas (BSP) to perform trust and other fiduciary businesses. One of the products of BDO-Trust is the PGF. On June 7, 2000, the PGF has been duly approved by the BSP as a long term common trust fund (CTF) which can avail of the tax exemption benefits under Section 24 (B) (1) of the Tax Code of 1997. Likewise, the Bureau of Internal Revenue (BIR) issued BIR Ruling DA-413-2000 dated November 29, 2000, holding that interest income derived by individual depositors, whether resident alien or non-resident alien individuals engaged in trade or business in the Philippines except alien individuals not engaged in trade or business within the Philippines, from long term deposit or investment accounts in the form of, among others, common trust fund like the PGF, is exempt from the 20% final tax imposed under Section 24 (B) (1) of the Tax Code, as amended. PGF is established and managed by Banco de Oro, through its Trust and Investments Division. The investors place funds in the PGF which would remain there for at least five (5) years. If the investors withdraw their funds in the PGF before the fifth year, their income from the PGF is taxed based on the schedule provided under Section 24 (B) (1) of the Tax Code, as amended. It was further represented that the funds in the PGF are subsequently invested by BDO-Trust in government securities such as fixed rate treasury notes issued by the National Government (NG) through the Bureau of Treasury (BTr) with maturities of at least five (5) years. In reply, please be informed that pertinent portions of Sections 24 (B) (1) and 25 (A) (2), both of the Tax Code of 1997, as amended, provide 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 twenty percent (20%) final tax imposed under this Subsection; Provided, finally that, should the holder of the certificate pre-terminate the deposit 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%." Relative to the above, Section 22 (FF) of the Tax Code of 1997, as amended, 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 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 denomination of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP." EaHATD The above sections denote that as long as the long term trust or fund is held by a bank for at least five years, and has complied with the requirements under Sec. 22 (FF) of the Tax Code of 1997, as amended, the interest income of the trust is exempt from the 20% final tax, subject, however, to the proviso that if the individual participant pre-terminates his long term investment before the five-year maturity date of the corresponding certificate of participation, the entire interest earnings shall be subject to a final withholding tax, the rate of which shall depend on the holding period. The trustee-bank shall withhold and deduct from the proceeds of such investment the final tax thereon the amount of which shall be computed in accordance with the schedule prescribed under Sections 24 (B) (1) and 25 (A) (2), both of the Tax Code of 1997, as amended. In BIR Ruling No. DA-527-2007 dated October 4, 2007, this Office ruled that the act of placing the funds in the Bank in the form of common or individual trust fund wherein the funds are locked-up with the Bank for a period of not less than 5 years already fulfills the intention of the law. In other words, the fact that the fund is invested in a trust fund and managed by a Bank and stays there for not less than five years, the same is already considered a long-term investment within the contemplation of Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997. Thus, regardless of the term of the investment or maturity of the instrument in which it is subsequently invested, the interest income of the trust is exempt from income tax and, consequently, from the required withholding tax. (Citing BIR Ruling Nos. 031-01 dated July 24, 2002 and DA-064-2002 dated April 3, 2002) Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997, as amended, only requires that the investment of the individuals in the long-term deposit or investment certificate be more than five (5) years and not that the funds invested in the long-term deposit or investment certificate be in turn invested in another long-term instrument. Thus, with respect to income recognition, it is clear that the above granted exemption privilege is given to individuals savers as a consequence of their having made a long-term investment in the long-term deposit or investment certificate, regardless of where the bank as a depository bank or as trustee invests such funds. Such being the case, and inasmuch as the PGF has been determined to be a long-term investment in BIR Ruling No. DA-413-2000, supra , this Office hereby holds that any interest income derived by PGF's investments, regardless of the term of the investments or maturity of the underlying instruments in which it is subsequently invested, is exempt from income tax and consequently, from the required withholding tax. TAEcCS This ruling is issued on the basis of the foregoing facts as represented. However, if it shall be disclosed upon investigation that the facts are different, then this ruling shall be without force and effect. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service