BIR Ruling No. 084-12

February 15, 2012 BIR RULING NO. 084-12 Sections 24 (B) (1) & 25 (A) (2) 1997 Tax Code; Revenue Memorandum Circular No. 18-2011; BIR Ruling No. 028-2010 Chato & Vinzons-Chato 8th Flr. Strata 2000, F. Ortigas Jr. Road Ortigas Center, 1605 Pasig City Attention: Esther R. Ibaez Gentlemen : This refers to your letter dated May 3, 2011 requesting on behalf of China Bank Savings the confirmation on the following: 1) The interest income earned by clients of China Bank Savings-Trust Department under the long term Trust/Investment Management Account (IMA) arrangements is exempt from the 2% creditable withholding tax required for corporate borrowers belonging to the top 10,000 taxpayers; and 2) In case of pre-termination of dollar-denominated long term Trust/IMA arrangements before the lapse of the minimum five (5) years and one (1) day holding period, the same shall be subject to a final tax ranging from 5% to 20% depending on the remaining maturity thereof. We reply, as follows: On the first issue, please take note that the exemption from income tax on interest income is allowed to individual citizens, resident alien individuals and non-resident alien individuals engaged in trade or business in the Philippines who invest in long-term deposit or investment certificates. Sections 24 (B) (1) of the National Internal Revenue Code of 1997, as amended, provides, thus: ATHCac "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 substitutes 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 investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate 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 (4) years 12%; and Less than three (3) years 20%" Likewise, Section 25 (A) (2) infra provides "(2) . . . 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 tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate 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 investments certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years 5%; Three (3) years to less than (4) years 12%; and Less than three (3) years 20%" Corollarily, Section 22 (FF) of the Tax Code of 1997, defines the term "long term deposit or investment certificate" as follows: ISDHcT (FF) The term 'long-term deposit or investment certificates' 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 nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP. Revenue Memorandum Circular No. 18-2011 dated April 12, 2011, in clarifying the income tax exemption of interest income earnings from long-term deposits or investments certificates, provides that the following characteristics/conditions should be present to enjoy income tax exemption, to wit: 1. the depositor or investor is an individual citizen (resident or non-resident) or resident alien or nonresident alien engaged in trade or business in the Philippines and not a corporation; 2. the long-term deposits or investments certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank; 3. the long-term deposits or investments must be 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); 4. the long-term deposits or investments must be issued by banks only and not by other financial institutions; 5. the long-term deposits or investments must have a maturity period of not less than five years; 6. the long-term deposits or investments must be in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP; 7. only the interest income from long-term deposits or investments certificates are covered by income tax exemption; SIDEaA 8. income tax exemption does not cover any other income such as gains from trading, foreign exchange gain; and 9. the long-term deposits or investments should not be terminated by the investor before the fifth year, otherwise it shall be subjected to the graduated rates of 5%, 12% or 20% on interest income earnings. Therefore, the availment of exemption from the income tax and, consequently, from the required withholding tax, of the interest income derived by the clients of China Bank Savings from long term Trust/IMA arrangements depends on the strict and full compliance of the above-cited conditions, otherwise, the interest income shall be subject to the 20% final withholding tax under Sections 24 (B) (1) and 25 (A) (2) of the Tax Code of 1997, as amended, and the 2% creditable withholding tax under Revenue Regulations (RR) No. 2-98, as amended. For this reason, a tax exemption certificate is not required for the provisions of Sections 24 (B) (1) and 25 (A) (2) to apply to the interest income derived by the clients of China Bank Savings from long term Trust/IMA arrangements. (BIR Ruling No. 028-2010 dated August 12, 2010 ). On the second issue, it bears stressing that Section 22 (FF) of the Tax Code of 1997, defines the term "long term deposit or investment certificate", which we again quote herein for emphasis, as follows: "(FF) The term 'long-term deposit or investment certificates' 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 nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP." (emphasis supplied) Based on the above-cited provision, one of the requisites for the exemption is that the long-term deposit or investment certificates must be in denominations of Ten Thousand pesos (P10,000) and other denominations as may be prescribed by the BSP. It is, thus, explicit that what is covered by the tax exemption is only interest income earning from Philippine Peso denominated long-term deposits or investments certificates. Although Sections 24 (B) (1) and 25 (A) (2) of the 1997 Tax Code, apparently, did not make a qualification as to the currency covered by the exemption, the said provisions must be correlated with Section 22 (FF) which laid down what constitutes "long-term deposit or investment certificate" covered by the exemption under the preceding sections. TcDaSI It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. In City of Iloilo, et al., vs. Smart Communications, Inc., G.R. No. 167260, February 27, 2009, the Supreme Court held that: "The basic principle in the construction of laws granting tax exemptions has been very stable. As early as 1916, in the case of Government of the Philippine Islands v. Monte de Piedad, this Court has declared that he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake. This doctrine was repeated in the 1926 case of Asiatic Petroleum v. Llanes, as well as in the case of Borja v. Commissioner of Internal Revenue (CIR) decided in 1961. Citing American jurisprudence, the Court stated in E. Rodriguez, Inc. v. CIR: 'The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity of the government; and he who claims an exemption from the common burden, must justify his claim by the clearest grant of organic or statute law. . . When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim; it is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported.' Finally, for better monitoring purposes, the bank shall have to set up a separate numbering system in its books for its long term Trust/IMA arrangements with its 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue