Banco de Oro

September 4, 2009 BIR RULING [DA-(FIT-016) 492-09] Secs. 22 (FF), 24 (B) (1) & 25 (A) (2); BIR Ruling No. 031-01, DA-413-00, DA-527-07, DA (FIT-004) 117-09 & DA-(FIT-008) 249-09 Banco de Oro 12 ADB Avenue, Ortigas Center Mandaluyong City Attention: Atty. Cristina Barbara V. Concepcion Senior Assistant Vice President Gentlemen : This refers to your letter dated July 7, 2009 requesting for confirmation of your opinion that the interest income to be derived by your clients from the BDO Personal Retirement Account and BDO Personal Pension Account is exempt from the 2% final tax imposed under Sections 24 (B) (1) and 25 (A) (2) of the Tax Reform Act of 1997. As represented, Banco de Oro Unibank, Inc. is a universal bank organized and existing under Philippine laws. The Bank, through its Trust and Investments Group, is planning to launch new products namely: the BDO Personal Retirement Account and the BDO Personal Pension Account. These are long term individual trust or long term individual investment management arrangements wherein the trustor (in case of a trust account) or a principal (in case of an investment management account) contributes his own fund into the account and the Trustee/Investment Manager holds and manages the funds for the future needs of the Trustor/Principal, particularly at retirement. The objective of the accounts is primarily to provide supplemental funds to individuals for their retirement in addition to government or company initiated retirement plans. The features of the accounts are as follows: 1. Eligible trustors/principals are limited to individuals who are Filipino citizens or resident aliens; 2. The underlying agreements are non-negotiable and non-transferable and will comply with BSP's requirements for long term trust and long term investment management accounts under Monetary Board Resolution No. 1748 dated December 10, 1999; TDaAHS 3. There shall be a five (5) year holding period for the amounts contributed into the trust/investment management account; 4. If the principal is withdrawn within the five (5) year holding period, interest income shall be subject to final withholding tax at the rates specified under Section 24 (B) (1) and 25 (A) (2) of the Tax Reform Act of 1997 depending on the holding period, to wit: Holding Period Applicable 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% 5. The funds will be invested in long term (more than 5 years) and/or short term (5 years or less) investment outlets. After the five (5) year holding period, the Trustor/Principal shall have the option to a) withdraw the interest and the principal on a lump sum basis or through regular pay-outs; b) withdraw the interest and let the principal stay in the account; or c) let the principal and interest stay in the account. All principal and interest amounts which continue to be placed in the account after the five (5) year holding period shall enjoy income tax exemption for as long as the funds stay in the account. The Trustor/Principal shall specify a date when he will withdraw/start withdrawing his funds either on a lump sum basis or through regular pay-outs. THIAaD 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 National Internal Revenue Code (NIRC), 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 NIRC 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 as may be prescribed by the BSP." In relation, Sections 24 (B) (1) and 25 (A) (2), both of the NIRC 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 the aforecited Subsections: 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: TAIESD 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% In view of the foregoing, and provided that the Bank complies with the requisites of "long-term deposit or investment certificate" as defined under Section 22 (FF) of the NIRC, to wit: 1. Have a maturity of not less than five (5) years; 2. Be in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts or other forms which must be prescribed by the Bangko Sentral ng Pilipinas; 3. Be issued by banks only (not by non-bank financial intermediaries and finance companies); 4. Be issued to individual citizen or resident alien or non-resident alien engaged in trade or business within the Philippines only; 5. Be in denominations of Ten thousand pesos (P10,000.00) or other denominations as may be prescribed by the Bangko Sentral ng Pilipinas; and 6. Should not be pre-terminated by the holder before the fifth year. EHCaDS regardless of the term of the investment or maturity of the instrument in which it is subsequently invested, the interest income to be derived by your clients from the BDO Personal Retirement Account and BDO Personal Pension Account is exempt from the 20% final tax imposed under Sections 24 (B) (1) and 25 (A) (2) of the Tax Reform Act of 1997. However, the withdrawal of the principal deposit/investment before the 5th year would subject the said entire earnings to a final withholding tax depending on the holding period of the instrument computed in accordance with the above schedule. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service