BIR Ruling No. 028-10

August 12, 2010 BIR RULING NO. 028-10 Section 24 (B) (1); BIR Ruling No. 101-98, BIR Ruling No. 63-00 and BIR Ruling No. 03-05 Philippine Business Bank 350 Rizal Avenue Extension cor. 8th Avenue Grace Park, Caloocan City Attention: Constantino B. Bombais First Vice President/Trust officer and Emerencia M. Samson Assistant Vice President Gentlemen : This refers to your letter dated September 29, 2009 requesting for confirmation on the tax exemption from the 20% final withholding tax under Section 24 (B) (1) of the 1997 Tax Code on the interest income from deposit or investment derived by Long-term Investment Management Accounts (Long-term IMA) administered by the bank through its Trust and Investment Center. SEHDIC It is represented that Philippine Business Bank is a domestic banking corporation organized and existing under and by the virtue of the laws of the Philippines and duly licensed to engage in trust and other fiduciary business. Philippine Business Bank through its Trust and Investment Center is offering to its clients the establishment of Tax-Exempt Investment Management Accounts (IMA) which is a long term investment agency arrangement whereby the investor (as principal) opens an IMA account and gives instructions to the Bank's Trust and Investment Center (as Agent) to invest his/her funds in securities which are acceptable to the investor at prevailing market rates. The features common to all of the long term tax-exempt IMA approved by the Board of the Philippine Business Bank are: (a) At least Php1.0 Million per account; (b) Minimum term of five (5) years and one (1) day. IMA term may be co-terminus with the investment term (if longer than five years); (c) Individuals who are Filipino citizens, resident aliens, or non-resident aliens doing business in the Philippines and who have the capacity to enter into contracts; (d) Government securities, Prime companies' Fixed rate bonds or Corporate Notes or other investment outlets specifically authorized by the Principal in writing; (e) Interest income is exempt from income tax or 20% final withholding tax provided the funds stay in the IMA account for at least five (5) years without pre-termination. (f) If pre-termination of IMA account cannot be avoided, the income of the funds withdrawn before the lapse of the five (5)-year period counted from the time the contribution was made, shall be taxed at the following rates: DcAEIS Holding Period Applicable to Tax Rate Less than three (3) years 20% Three (3) years to less than four (4) years 12% Four (4) years to less than five (5) years 5% Five (5) years or more 0% 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 Tax Code 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 Tax Code of 1997 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 may be prescribed by the BSP." In relation to this, Sections 24 (B) (1) and 25 (A) (2), both of the Tax Code, as amended, 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 Subsections: 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: CcSEIH "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%" In view thereof, and considering that your proposed Long Term Investment Management Account (LT-IMA) as described above are in full compliance with the requisites of "long-term deposit or investment certificate" as defined under Section 22 (FF) of the Tax Code, as amended, the interest income to be derived therein by your individual clients, who are Filipino citizens, resident aliens, as well as non-resident aliens engaged in trade or business within the Philippines, shall be exempt from the 20% final withholding tax under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997, as amended. A meticulous study of the above-cited section disclosed further that there is nothing which would prohibit your individual clients who are holders of the certificates to pre-terminate the deposit or investment before the fifth (5th) year period. 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 as stated above. Finally, for better monitoring purposes, the bank shall have to set up a separate numbering system in its books for these proposed Long Term Investment Management Accounts (LT-IMA) you will now be offering to your individual clients. 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. HIACac Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue