East West Banking Corporation

September 23, 2009 BIR RULING [DA-(FIT-020) 564-09] 24 (B) (1), 22 (FF); DA-294-08; DA-527-07; 030-01 East West Banking Corporation 6795 Ayala Ave., Herrera St. Salcedo Village, Makati City Attention: Ms. Erika Joy Salvador Head, Trust Division Gentlemen : This refers to your letter dated April 1, 2009 requesting for confirmation of the exemption from tax on interest income derived by the underlying instruments/investments of East West Banking Corporation's (EWBC) long-term trust accounts and consequently from the required withholding tax. It is represented that EWBC is a banking corporation organized and existing under the laws of the Republic of the Philippines with authority to perform trust and fiduciary functions through its Trust Division; that to encourage long-term investment, particularly among its trust clients, EWBC intends to offer the Long Term Investment Management Agreement (LTIMA) and Long Term Trust Agreement (LTTA) pursuant to and in compliance with the requirements of the Memorandum dated January 03, 2000 of the Bangko Sentral ng Pilipinas (BSP); that the LTIMA and LTTA will carry the following general terms and conditions: a) Eligible investors shall be limited to individuals who are Filipino citizens, resident aliens or non-resident aliens engaged in trade or business within the Philippines; EcAHDT b) The amounts contributed to the accounts are to be held for at least five (5) years in denominations as may be prescribed by the BSP; c) Income, but not principal, may be withdrawn by or paid to the client or his/her beneficiary/ies, during the five (5) year holding period; d) If Principal is withdrawn within the 5 years holding period, interest income shall be subject to final withholding tax at the rates specified under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code depending on the holding period to wit: Holding Period Applicable Tax Rate Four years to less than 5 years 5% Three years to less than 4 years 12% Less than 3 years 20% Based on the foregoing, you are requesting confirmation of your opinion as follows: 1. That the interest income derived from Long Term Investment Account (LTIMA) and Long Term Trust Account (LTTA), administered by the Trust Division of East West Banking Corporation, are exempt from income tax and consequently, from the required withholding tax pursuant to Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997; and cSIADH 2. That the exemption applies regardless of the term of the underlying investment or maturity of the instrument in which the trust fund is subsequently invested as long as the fund is invested in a trust fund and managed by EWBC and locked up with the bank for a period of not less than five (5) years. In reply thereto, please be informed that Section 24 (B) (1) of the Tax Code of 1997 provides "(B) Rate of Tax on Certain Passive Income. (1) 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 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%" Relative thereto, Section 22 (FF) supra defines the "long term deposit or investment certificate" as follows: EICSTa "(FF) 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." Thus, applying the above-cited provisions of the 1997 Tax Code, as long as the trust or fund is held by a bank for at least five years and has complied with the requirements mentioned in BIR Ruling No. 030-01 dated July 24, 2002, 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 BSP; 3. Be issued by banks only (not by non-bank financial intermediaries and finance companies); ATESCc 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 BSP; and 6. Should not be pre-terminated by the holder before the fifth year. the interest income of the trust is exempt from income tax and consequently, from the required withholding tax, regardless of the term of the investment or maturity of the instrument in which it is subsequently invested. 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 Section 24 (B) (1) of the Tax Code of 1997. (BIR Ruling Nos. DA-527-07 dated October 4, 2007; DA-294-08 dated May 16, 2008) Consequently, this Office holds that any interest income derived by the LTIMA or LTTA from the underlying instrument, whether long term or short term in which the trust funds are invested by EWBC should properly be exempt from income tax and from the required withholding tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. aHDTAI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service