Asia United Bank Corporation

January 20, 2009 BIR RULING [DA-(TSF-001) 023-09] Sec. 24 (B) (1); 30-01; DA64-02; DA527-07; DA294-08 Asia United Bank Corporation No. 347 G/F Morning Star Building Sen. Gil Puyat Avenue Makati City Attention: Mr. Andrew A. Chua Senior Vice President Gentlemen : This refers to your letter dated August 5, 2008 requesting for confirmation that the interest income earned by Individual Trust Accounts (ITAs) held in trust by the Trust Department of Asia United Bank Corporation under the name of Gold Chest Plan program for the benefit of individual citizens and resident aliens is exempt from income tax or any withholding tax pursuant to Sections 24 (B) (1) of the Tax Code. It is represented that Asia United Bank Corporation is a commercial bank duly authorized to perform trust functions, organized and existing under the laws of the Philippines; that it is duly licensed to do business in the Philippines by the Securities and Exchange Commission and engaged in banking and trust operations by the Bangko Sentral ng Pilipinas (BSP); that to address the demand of its individual clients for long-term investment products, Asia United Bank Corporation intends to offer the ITAs pursuant to and in compliance with the requirements of the memorandum of the Bangko Sentral ng Pilipinas dated January 3, 2000; that the ITAs carry the following general terms and conditions: a) Eligible investors shall be limited to individuals who are Filipino citizens or resident aliens; b) Minimum investment holding period is at least five (5) years; c) Investments in ITAs shall be evidenced by pre-printed agreements in such form as prescribed by the Bangko Sentral ng Pilipinas and clearly indicating the following information: i. Investors are limited to individuals who are Filipino citizens or resident aliens and that the investment is non-negotiable and non-transferable; ii. Date of investment to determine compliance with the required holding period; AacCHD iii. The ITA agreements shall indicate that pursuant to Section 24 (B) (1) of R.A. No. 8424 "interest income of the Portfolio derived from investments in interest-bearing instruments which are otherwise subject to the 20% final tax shall be exempt from said final tax provided that the fund is held by the Trustee for at least five (5) years. Otherwise, should the trustor/s pre-terminate the ITA or otherwise partially withdraw the principal portion of the Portfolio before the 5th year, a final tax shall be deducted and withheld on the entire income of the Portfolio based on the following schedule: 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% and that Asia United Bank Corporation intends to invest the funds held in ITAs in long-term and short-term maturity instruments. 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%" aAcHCT Corollarily, Section 22 (FF), supra defines the term "long term deposit or investment certificate" as follows: "(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." A careful scrutiny of the above-cited sections disclosed that 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 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. 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. 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) of the Tax Code of 1997. (BIR Ruling Nos. DA-527-07 dated October 4, 2007; DA-294-08 dated May 16, 2008) SDIaHE SUCH BEING THE CASE, this Office holds that any interest income derived by the ITA from the underlying instrument, whether long term or short term, in which the trust funds are invested by Asia United Bank Corporation 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 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