Publishing Questions and Answers on Deposit Substitutes as Amended by Revenue Regulations Nos. 8-81 and 16-81

October 12, 1981 REVENUE MEMORANDUM CIRCULAR NO. 35-81 SUBJECT : Publishing Questions and Answers on Deposit Substitutes as Amended by Revenue Regulations Nos. 8-81 and 16-81 TO : All Internal Revenue Officials, Employees and Others Concerned 1. Question : Revenue Regulations No. 8-81 (20% final withholding tax) applies to "income derived from banking activities" while paragraph (h) of Revenue Regulations No. 16-81 (20% creditable withholding tax) applies to "other trust arrangements" not covered by either RR 8-81 or paragraph (g) of RR 16-81 (15% creditable withholding tax on income distributed to trust beneficiaries). Are non-bank financial intermediaries, whether quasi-bank or non-quasi bank, performing trust and/or investment management functions covered by these regulations as are trust/investment management operations of banks? Answer : Revenue Regulations No. 8-81 taxes specifically income from banking activities of banks and non-bank financial intermediaries with quasi-banking license. As such, all other institutions such as financing companies, non-bank financial intermediaries with no quasi-banking license are not covered by the 20% withholding tax. Their trust and investment management activities, however, are subject to RR 13-78 and the amending RR 16-81, either to the 15% or 20%. 2. Question : Because of client's desire to preserve the confidentiality inherent in trust arrangement, may income of trust clients be withheld taxes on a final 20% rather than creditable? cd Answer : RR-8-81 effective May 1, 1981 stipulates the type of trust arrangements on which the 20% final withholding tax is applicable. RR 16-81, on the other hand, through the addition of paragraph (h) to RR 13-78 provides for a 20% creditable withholding tax effective August 1, 1981 on trust arrangements otherwise not covered by the 20% final and the old 15% creditable withholding taxes. A client of any banking institution or any non-bank financial intermediary with quasi-banking license wishing to be withheld taxes on a final basis rather than on a creditable basis should have a trust arrangement which may be considered as deposit substitutes for tax purposes, i.e, which either assures or guarantees return on investment although indeterminable; otherwise income of said client on arrangement other than those covered above shall be subject to the 20% creditable withholding tax. 3. Question : Revenue Regulations No. 8-81 redefines "deposit substitutes" to include certain trust/agency arrangement of banks. The apprehension among banks whose clients wish to be withheld taxes on a final basis for reasons of confidentiality is that these trust/agency arrangements may be construed as deposit substitute and consequently be subject to various Central Bank reserve requirements and Securities and Exchange Commission registration requirements. What is the BIR stand on this? Answer : While the Bureau is aware of these implications, the sole concern of the tax regulation is to generate tax revenues from various income sources. The definition of "deposit substitute" under Revenue Regulations No. 8-81, therefore, is only for purposes of taxation. 4. Question : Where trust funds are disposed of in tax-free (e.g. tax exempt government securities) or tax paid (e.g. savings, time deposit, money market instruments) investments, need taxes be withheld again on income therefrom? Answer : There is no need withhold taxes under these situations. 5. Question : What is the BIR interpretation of the effectivity of the imposition of the 20% withholding tax? Answer : The 20% creditable withholding tax imposed by Revenue Regulations No. 16-81 should be withheld on income earned beginning August 1, 1981 of all trust arrangements other than those considered as deposit substitutes; whereas, the 20% final withholding tax imposed by RR 8-81 applies to income earned on trust arrangements considered as a deposit substitute beginning May 1, 1981. All internal revenue officers and employees are enjoined to be guided accordingly and to give this circular as wide a publicity as possible. RUBEN B. ANCHETA Acting Commissioner