Clarification on the New Regulations on Withholding Tax Imposed on Earnings of Trust Accounts

October 27, 1981 BIR RULING NO. 208-81 53-f 000-00 208-81 Law Offices San Juan, Africa, Gonzales & San Agustin 4th Flr., Traders Royal Bank Bldg. Aduana St., Intramuros, Manila Attention: Atty . Juan de Ocampo Gentlemen : This refers to your letter dated September 17, 1981 requesting clarification on the new regulations on withholding tax imposed on earnings of trust accounts. It is represented that in an investment management agreement which calls for a principal-agent relationship, the Trust Department of a Bank is constituted as the attorney-in-fact in the performance of certain investment acts/participations; that in the said agreement, the Investment Manager shall Invest and reinvest all money of the Fund delivered by the Principal in fixed-income securities and or promissory notes, bonds, money market investments and other interest bearing securities or any other property, real or personal; and that the Investment Manager shall collect and receive all income, interest and profits accruing to or due to the Fund. In reply, please be informed that Section 1(h) of Revenue Regulations No. 13-78, as amended by Revenue Regulations No. 16-81, implementing Section 53(f) of the Tax Code, as amended by Presidential Decree No. 1351, provides as follows: "(h) Other trust arrangements . On yield/income, not previously subjected to a final tax, pertaining to all other trust and similar arrangements, whether covered by a trust indenture/agreement or by an investment/portfolio management agreement or any other similar document involving the investment/management of funds: Provided, That any such arrangement (i) does not fall within the purview of the preceding Subsection (g) hereof, and (ii) is not characterized as a trust certificate under the definition of 'deposit substitutes', pursuant to Section 2(g) of Revenue Regulations No. 12-80, as amended by Revenue Regulations No. 8-81 twenty per centum (20%)." Applying the foregoing provisions of the regulations to the present case, if the Investment Manager reinvests the Fund in deposit substitutes as defined in Section 2(g) of Revenue Regulations No. 12-80, as amended by Revenue Regulations No. 8-81, the yield on said deposit substitutes are subject to the 20% final tax to be deducted, withheld and paid by the borrower. In such case, when the Investment Manager (Trustee) pays interest to the Principal (Trustor), no further deduction and withholding is required. However, if the Trustee reinvests the Fund in transactions, the income of which is not subject to the final tax, and the Trustee pays interest income to the Trustor, pursuant to the above-quoted provisions of Revenue Regulations No. 13-78, as amended, the former shall deduct, withhold and pay the 20% tax which is creditable against the income tax due from the latter. Very truly yours, ROMULO M. VILLA Acting Commissioner