BDO Private Bank, Inc.

October 14, 2009 BIR RULING [DA-(FIT-022) 602-09] 24 (B) (1); RR No. 17-2003; DA-201-04 BDO Private Bank, Inc. 27/F Tower One, Ayala Triangle Ayala Ave., Makati City Attention: Atty. Clarissa M. Pealosa Vice President Head, Trust Legal and Compliance Unit Atty. Federico P. Tancongco Vice President Head, Trust Legal and Compliance Unit Atty. Maritess So-Co Assistant Manager Trust Legal and Compliance Unit Gentlemen : This refers to your letter dated December 24, 2008 requesting confirmation of your opinion that interest payments made by borrowers among the top ten thousand corporations for their loans funded by BDO Private Bank-Wealth Advisory and Trust Group ("BDOPB-WATG"), acting as trustee of various funders, are not subject to the 2% creditable withholding tax as prescribed in Section 2.57.2 (M) of Revenue Regulations (Rev. Regs.) No. 17-2003, amending RR 2-98. It is represented that BDOPB is a wholly owned subsidiary of Banco de Oro Unibank, Inc. and has been granted a trust license by the Bangko Sentral Ng Pilipinas (BSP) to engage in trust and fiduciary business which is carried through its Trust Department known as "Wealth Advisory and Trust Group" ("WATG"); that clients/trustors invest their funds through various trust products such that BDOPB, as trustee, holds legal title to the funds but the clients/trustors retain beneficial title thereto; that BDOPB-WATG invests the funds of the clients/trustors in various investment outlets including loans to or debt securities issued by the top ten thousand corporations; that these loans are evidenced by promissory notes in favor of BDOPB-WATG for the various funders; that interest payments from said loans are also made to BDOPB-WATG as trustee of such funders; that the interest payments are in turn conveyed by BDOPB-WATG to the concern trust accounts which funded the loans; that BDOPB-WATG withholds final tax on the interest payments based on the rate required for interest income of the concerned trust funds upon release of funds or interest thereof to the clients/trustors pursuant to Section 24 (B) (1) of the 1997 Tax Code, as the case may be; that interest payments are not the income of BDOPB-WATG but of the funders (clients/trustors); and that as compensation for its services as trustee, BDOPB-WATG is paid pre-agreed trust fees by the clients/trustors. TcEaAS In reply thereto, please be informed that Section 2.57.2 (M) of Rev. Regs. No. 17-2003, amending Rev. Regs. 2-98, which provided that: "(M) Income payments made by the top ten thousand (10,000) private corporations to their local resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. Income payments made by any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, to their local/resident supplier of goods and local/resident supplier of services, including non-resident alien engaged in trade or business in the Philippines Supplier of goods One percent (1%) Supplier of services Two percent (2%) "xxx xxx xxx" In BIR Ruling No. DA-201-04 dated April 12, 2004 which is on all fours with the representations in this case, the BIR is of the position as follows: "Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sections 51 and 41 of the Tax Code of 1997, to report the income and/or pay the difference between the tax withheld and the tax due on the income. (Section 2.57(B), Revenue Regulations No. 2-98, as amended) On the other hand, under the final withholding tax system, the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. In the instant case, the interest payments made by the top ten thousand corporations are already covered by other rates of withholding tax which is the 20% final withholding tax as prescribed in Sections 24(B)(1) and 27(D)(1) of the Tax Code of 1997. Thus, the subject interest payments are not income payments to BDO-Trust but to the clients/trustors, notwithstanding that BDO-Trust holds legal title to the funds, but the beneficial title remains with the clients/trustors. It is for this reason that the interest paid by BDO-Trust to its clients/trustors is already subject to the 20% final withholding tax. SUCH BEING THE CASE, the interest payments made by the top ten thousand corporations for its loans funded by BDO-Trust, acting as trustee of various funders, is no longer subject to the 2% creditable withholding tax prescribed in Section 2.57.2(M) of Revenue Regulations No. 17-2003, amending Revenue Regulations No. 2-98." Based on the foregoing, this Office hereby confirms your opinion that the interest payments made by the top ten thousand corporations for their loans funded by BDO-WATG, acting as trustee of various funders, are no longer subject to the 2% creditable withholding tax prescribed in Section 2.57.2 (M) of Revenue Regulations No. 17-2003, amending Revenue Regulations No. 2-98, considering that the interest conveyed by BDO-WATG to its clients/trustors is already subject to the 20% final withholding tax. SaETCI 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group