BIR Ruling No. 294-82

November 18, 1982 BIR RULING NO. 294-82 21-d 000-00 294-82 The National Development Company NDC Building 377 Buendia Avenue Extension Makati, Metro Manila Attention: Mr . Antonio L . Carpio General Manager Gentlemen : This refers to your letter dated September 30, 1982, stating that in view of the powers and functions provided for by Section 4 of P.D. No. 1648, otherwise known as the Revised Charter of NDC, that company intends to establish a fund under an Investment Management Agreement (IMA), through the issuance of the authorized P100 million (revolving) worth of National Development Fund Certificates (NDF Certificates) which shall evidence the extent of the investor's participation in the fund, denominated in units at a par value of P1,000 per unit, issuable in series, and each series will differ from any other series in that each series will refer to the holder's participation in a particular sub-fund composed only of investors of the same series; that the establishment of the fund will enable that company to source additional funds for its various projects: that the investors will authorize that company to invest their funds at its discretion, with full title and ownership of the funds always remaining with the investors; that as Investment Manager for the investors in the fund, NDC shall not be entitled to any management fee or share in income from said fund; that the NDF Certificates' term shall be open-ended, i.e. from the date of issue until such time as they are tendered for redemption; that they shall be sold or released through the branches of PNB, DBP and Interbank with the said banks serving as the redemption agents and as the paying agents for the semi-annual yields; that all net returns shall accrue entirely to the investors' benefit and shall be distributed through: (a) semi-annual yields and (b) redemption premiums; and that NDF Certificates shall be redeemable at anytime at the option of the investor, from NDC, or its duly authorized redemption agents. Redemption price shall be the higher of: (a) par value plus accrued 12% yield or (b) net asset value plus accrued 12% yield. Proceeds from redemption shall be subject to a fixed handling charge per unit. Net asset value shall be defined as the market worth of the fund's total resources securities, cash, and any accrued earnings after deduction of the next quarter's accrued 12% yield payable, operating expenses and other liabilities if any. Net asset value shall be determined and published quarterly, and shall be expressed on a per unit basis. cdtech Based on the foregoing representation, you propounded the following questions: "1. If income is earned by the Fund under the IMA, will such income be considered as the income of the individual investors? "2. Whenever, a portion of the Fund's income shall already be subject to final taxes, will such portion still form part of the investor's income and will it still be further subject to income tax? "3. Will the commingling of the funds received from individual investors into one Fund for investment purposes result in the Fund's being subject to corporate income tax?" In reply, please be informed that since you are neither a trust company nor a bank or an investment house authorized by the Central Bank of the Philippines (CB) to perform trust functions, the fund proposed to be established by you is not in the nature of a trust fund or similar arrangement as contemplated by Section 21 (d) in relation to Section 53(d) (1), both of the Tax Code as amended, which means an arrangement wherein a fund is maintained by a trust company, bank, or investment house authorized by the CB 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. 2(D)(2), Rev. Regs. No. 1-82 dated March 18, 1982 implementing Sec. 21(d), NIRC as amended by B.P. Blg. 135). It is clear from the stated facts, that NDC is not playing the role of trustee, looking for possible debtors of the fund. NDC is actually looking for funds from the public, which funds shall be invested in its projects. Thus, when the transaction is viewed as a whole, the relationship between NDC and the NDF certificate holder is that of debtor-creditor. Despite the statement that NDC acts "only as agent with full title and ownership always remaining with the investors", there are indications that the transaction is in essence a loan. Among these are (i) NDC is authorized to invest the funds at its discretion, (ii) it will not receive any fee or other compensation for its services as the purported investment manager, and (iii) the basic purpose for the issuance of the NDF certificates is to enable NDC to source additional funds for its projects. Hence, we are of the view that the relationship established here is that of debtor-creditor. Such being the case, the investors or holders of NDF certificates shall be subject to income tax on the earnings of the fund to the extent of their respective investments therein in accordance with Section 21(b) of the Tax Code as amended by B.P. Blg. 135 in the case of the individual investors and Section 24 of the same Code for corporate investors. cdta Finally, inasmuch as the relationship between NDC and each particular NDF certificate holder is that of debtor-creditor at the outset, it cannot be said that the fund and the sub-funds are technically commingled funds for investment purposes. In this case, it may be said that the pooling of funds or sub-funds is merely for the purpose of determining the proper yield to the investor in the particular series of certificates, whose redemption price shall be the higher of (i) par value, plus accrued 12% yield, or (ii) net asset value plus accrued 12% yield. Very truly yours, RUBEN B. ANCHETA Acting Commissioner