Sterling Bank of Asia

November 27, 2009 BIR RULING [DA-(FIT-024) 714-09] 24 (B) (1), 22 (FF) & 25 (A) (2); DA (FIT-05) 490-09; DA-527-07; 031-01; DA-064-02; DA-413-00; & 063-2000 Sterling Bank of Asia Ground Floor, SSS Makati Building Ayala Avenue corner V.A. Rufino Street Makati City Attention: Atty. Melchor M. Cubillo Vice President Gentlemen : This refers to your letter dated August 7, 2009, requesting confirmation of your opinion that interest income earned by an individual trustor investing in a Long Term Revocable Living Trust for a period of at least five (5) years, or such other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP), wherein the term of the investment is for a period of not less than five years, is exempt from income tax regardless of whether the underlying investment of the trust fund or the original investment is composed of several short-term investments. The facts as represented are as follows: Sterling Bank of Asia ("Sterling Bank") is a Savings Bank duly organized and existing in accordance with the laws of the Republic of the Philippines and is authorized to perform trust and fiduciary functions through its Trust Group. Pursuant to said authority, Sterling Bank through its Trust Group ("Sterling Bank Trust"), is offering to its clients the establishment and management of non-negotiable and non-transferable Long Term Revocable Living Trust ("trust fund") in accordance with the purpose and intent of Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997, as amended, and the implementing Memorandum issued by the BSP on January 3, 2000. The trust fund is created upon the execution of the trust agreement between the trustor-investor and Sterling Bank, and takes effect upon the actual delivery of the fund to Sterling Bank. It shall continue to be in full force and effect until revoked in writing by the investor during his lifetime or upon the final distribution of the trust fund to the beneficiary pursuant to the terms of agreement. Under the trust agreement, the trust fund created is intended to be held by the trustee bank for a period of at least five (5) years wherein the trustor assigns, transfers and delivers to Sterling Bank, as the trustee, a specific sum of money for the purpose of placing the same either in a form of long term investments including deposits and deposit substitute instruments. By virtue of the trust created, the trustee shall have revocable legal title to the full and complete possession, management, administration, operation and control over the trust fund within the parameters laid down by law and the terms and conditions of the trust agreement. HCDAcE In addition to the Long Term Revocable Living Trust offered by Sterling Bank to its clients, it likewise offers Long Term Investment Management Accounts. Similar to the Long Term Revocable Living Trust, the interest income earned by an individual client/principal investing in a Long Term Individual Investment Management Account ("IMA") for a period of at least five (5) years, or in such other investments evidenced by certificates in such form prescribed by the BSP, wherein the term of the investment is for a period of not less than five years, is exempt from income tax regardless of whether the underlying investment of the IMA fund or the original investment is composed of several short-term investments. The Long Term Investment Management Accounts are only between individuals who are Filipino citizens or resident aliens and Sterling Bank of Asia Trust Group, as Investment Manager. The IMA Agreement shall be non-negotiable and non-transferable and the minimum amount of investment shall be P1 Million. 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." 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. ACcEHI In BIR Ruling No. DA (FIT-05) 490-09 dated September 4, 2009, 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 No. DA-527-2007 dated October 4, 2007) 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, for as long as the investment of the individual clients of Sterling Bank in its Long Term Revocable Living Trust and IMA products be more than five (5) years, any interest income derived by said clients therefrom, regardless of the term of the investments or maturity of the underlying instruments in which it is subsequently invested by Sterling Bank as the trustee bank, is exempt from income tax and consequently, from the required withholding tax. 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