Taxability of Yield from Investment Management Agreement Covering Short Term Funds

April 28, 1986 BIR RULING NO. 052-86 51 (d) (1) 287-82 052-86 Gentlemen : This refers to your letter dated July 30, 1984 stating that you are a financial intermediary offering your clients services as portfolio or fund manager whereby as their agent, you attend to the administration and management of their property or money or its equivalent; that in your agreement the actual disposition or investment of fund may be either made independently by you or upon direction of the client; that you also serve your client through your money desk where you buy or sell from them investment papers that are bought and sold in money market; that the funds entrusted to you for investment management and those invested directly through money market are funds which are temporarily idle and available for immediate short term investments. Based on the foregoing transaction you seek clarification on the following queries: 1. Is the yield from an investment management agreement covering short term funds subject to the 20% (now 17 1/2%) final withholding tax? 2. Will there be a change in the ruling if investment management agreement stipulates that the investments may be made only with the consent of or upon direction of the fund owner? 3. What exactly is meant by the phrase "yield or monetary benefit from trust fund and similar arrangement". Does this refer to income earned by the fund net of incidental expenses like investment management fee charged by the investment manager? In reply, I have the honor to inform you as follows: 1. Your first question is answered in the affirmative, Section 51(d)(1) (formerly Section 55(d)(1)) of the Tax Code, as amended by P.D. No. 1994, provides that every bank or non-bank financial intermediary or commercial, industrial, finance companies, and other non-financial companies authorized by the Securities and Exchange Commission to issue deposit substitutes shall deduct and withhold from the interest on bank deposits or yield or any other monetary benefit from deposit substitutes a final tax equal to seventeen and a half (17% ) per centum of the interest on deposits or yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements. Whether the investment management agreement involves long term funds or short term funds is not material. 2. There will be no change in the withholding tax rate on yield of deposit substitutes even if the fund owner will direct its investment. 3. Yield or any monetary benefit is based on adjusted gross interest or yield paid deposit substitutes and trust fund and similar arrangements. The latter means an arrangement wherein a fund is maintained by a trust company, bank, or investment house authorized to perform trust functions exclusively for the collective investment and re-investment of certain monies received in its capacity as trustee, or under similar arrangements. (Sec. 3(d)(2)(ii), Revenue Regulations No. 1-82) Yield from deposit substitutes means the difference between the amount which the lender/investor loaned/placed and the amount to be received by him upon maturity of the deposit substitutes debt instruments which shall in no case be lower than the interest rate prevailing at the time of the issuance or renewal of the said debt instrument. (Sec. 2(j), Revenue Regulations No. 17-84) Accordingly, said yield or monetary benefit constitutes the income earned by the fund which does not exclude incidental expenses like investment management fee charged by the investment manager for purposes of the 17 final tax due on said yield or monetary benefit. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner