COMMON TRUST FUNDS (CTFs), INDIVIDUAL TRUST INVESTMENT MANAGEMENT ACCOUNTS THAT MAY QUALIFY FOR TAX-EXEMPTION UNDER SECTION 24 (B)(1) OF R.A. NO. 8424
1999, Part IV (Trust, Other Fiduciary Business and Investment Management
Activities) of the Manual of Regulations for Banks is hereby amended so
as to include the following features/requirements for long-term
investment certificates in the form of common trust funds (CTFs),
individual trust and investment management accounts that may qualify for
tax-exemption under Section 24 (B)(1) of R.A. No. 8424, otherwise known
as “The Tax Reform Act of 1997”.
SECTION 1. The following provisions shall be added as Subsec. X409.8 under Sec. X409 on Trust and Other Fiduciary Business.
§ X409.8 Tax-exempt individual trust accounts. —
The following shall be the features/requirements of individual trust
accounts which may be exempted from the 20% final tax under Section
24(B)(1) of R.A. No. 8424 (The Tax Reform Act of 1997):
a. The tax exemption shall apply to trust indentures/agreements contracted on or after the effective date of this Memorandum;
b. The trust indenture/agreement shall only be between individuals
who are Filipino citizens or resident aliens and banks acting as
trustee. The trust indenture/agreement shall be non-negotiable and
non-transferable;
c. The trust indenture/agreement shall indicate that pursuant to
Section 24(B)(1) of R.A. No. 8424, interest income of the trust fund
derived from investments in interest-bearing instruments (e.g. time
deposits, government securities, loans and other debt instruments) which
are otherwise subject to the 20% final tax shall be exempt from said
final tax provided the fund was held by the trustee-bank for at least
five (5) years. If said fund was held for a period less than five (5)
years, interest income shall be subject to a final tax based on the
following schedule —
|
Holding Period
|
Rate of Tax
|
| Four (4) years to less than five (5) years | 5% |
| Three (3) years to less than four (4) years | 12% |
| Less than three (3) years | 20% |
Necessarily, the trust indenture/agreement shall clearly indicate the
date when the trustee-bank actually received the trust funds which
shall serve as basis for determining the holding period of the funds;
d. A trustee may accept additional funds for inclusion in trust
accounts which have been established as tax-exempt under R.A. No. 8424.
However, the receipt of additional funds shall be properly documented by
indicating that they are part of existing tax-exempt trust accounts and
that the interest income of the additional funds derived from
investments in interest-bearing instruments shall be exempt from the 20%
final tax under the same conditions mentioned in the preceding item.
The document shall also indicate the date when the funds were received
by the trustee-bank to serve as basis for determining the minimum five
(5) year holding period for tax exemption purposes of the additional
funds; and
e. Tax-exempt individual trust accounts established under this
Subsection shall be subject to the provisions of Subsecs. X409.1 (c) and
X409.2 up to X409.7.
SECTION 2. The following provisions shall be added as Subsec. X410.7 under Sec. X410 on Common Trust Funds.
§ X410.7 Tax-exempt common trust funds. — The
following shall be the features/requirements of CTFs which may qualify
for exemption from the 20% final tax under Section 24 (B)(1) of R.A. No.
8424 (The Tax Reform Act of 1997):
a. The tax exemption shall apply to CTFs established on or after the effective date of this Memorandum;
b. The CTF indenture or plan as well as evidences of participation
shall clearly indicate that participants shall be limited to individual
trustors/investors who are Filipino citizens or resident aliens and that
participation is non-negotiable and non-transferable;
c. The date of contributions to the CTF shall be clearly indicated
in the evidence of participation to serve as basis for the trustee-bank
to determine the period of participation for tax exemption purposes;
d. The CTF indenture/plan as well as the evidence of participation
shall indicate that pursuant to Section 24 (B)(1) of R.A. No. 8424,
interest income of the CTF derived from investments in interest-bearing
instruments (e.g. time deposits, government securities, loans and other
debt instruments) which are otherwise subject to the 20% final tax shall
be exempt from said final tax provided participation in the CTF is for a
period of at least five (5) years. If participation is for a period
less than five (5) years, interest income shall be subject to a final
tax which shall be deducted and withheld based on the following schedule
—
|
Participation Period |
Rate of Tax |
|
|
|
|
Four (4) years to less than five (5) years |
5% |
|
Three (3) years to less than four (4) years |
12% |
|
Less than three (3) years |
20% |
Necessarily, the date of contribution shall be clearly indicated in
the evidence of participation which shall serve as basis for determining
the participation period of each participant; and
e. Tax-exempt CTFs established under this Subsection shall be
subject to the provisions of Subsecs. X409.1 (c), X409.2 up to X409.7,
and X410.1 up to X410.6.
Regarding the required prior authority and disclosure under Subsecs.
X409.2 and X409.3, a list of prospective and/or outstanding investment
outlets that is made available by the trustee for the review of all CTF
clients may serve as an alternative compliance, which list shall be
updated quarterly.
SECTION 3. The following provisions shall be added as Subsec. X411.9 of Sec. X411 on Investment Management Activities.
§ X411.9 Tax-exempt individual investment management accounts.
— The following shall be the features/requirements of investment
management accounts of individuals which may be exempted from the 20%
final tax under Section 24 (B)(1) of R.A. No. 8424 (The Tax Reform Act
of 1997):
a. The tax exemption shall apply to investment management
agreements contracted on or after the effective date of this Memorandum;
b. The investment management agreement shall only be between
individuals who are Filipino citizens or resident aliens and investment
manager-banks. The agreement shall be non-negotiable and
non-transferable;
c. The minimum amount of investment for an investment management account shall be P1 million;
d. The investment management agreement shall indicate that pursuant
to Section 24 (B)(1) of R.A. No. 8424, interest income of the
investment management funds derived from investments in interest-bearing
instruments (e.g. time deposits, government securities, loans and other
debt instruments) which are otherwise subject to the 20% final tax
shall be exempt from said final tax provided the funds are held under
investment management by the investment manager for at least five (5)
years. If said funds are held by the investment manager for a period
less than five (5) years, interest income shall be subject to a final
tax which shall be deducted and withheld from the proceeds of the
investment management account based on the following schedule —
|
Holding Period |
Rate of Tax |
|
|
|
|
Four (4) years to less than five (5) years |
5% |
|
Three (3) years to less than four (4) years |
12% |
|
Less than three (3) years |
20% |
Necessarily, the investment management agreement shall clearly
indicate the date when the investment manager actually received the
funds which shall serve as basis for determining the holding period of
the funds;
e. The investment manager may accept additional funds for inclusion
in investment management accounts which have been established as
tax-exempt under R.A. No. 8424. However, the receipt of additional funds
shall be properly documented by indicating that they are part of
existing tax-exempt investment management accounts and that the interest
income of the additional funds derived from investments in
interest-bearing instruments shall be exempt from the 20% final tax
under the same conditions mentioned in the preceding item. The document
shall also indicate the date when the additional funds were received by
the investment manager-bank to serve as basis for determining the
minimum five (5) year holding period for tax exemption purposes of the
additional funds; and
f. Tax-exempt investment management accounts established under
this Subsection shall be subject to the provisions of Subsecs. X411.1
(b) and X411.2 up to X411.8.
SECTION 4. The following shall be added as last paragraph to Sec. X421 on Books and Records.
The bank’s trust department or investment management department
shall maintain separate general ledger accounts and other relevant
sub-accounts for tax-exempt individual trust accounts, CTFs and
individual investment management accounts established under Sec. 24
(B)(1) of R.A. No. 8424 and Subsecs. X409.8, X410.7 and X411.9. The
bank’s trust department or investment management department shall also
adopt appropriate systems, internal control procedures and audit trail
mechanisms to ensure that the correct amount of final tax is withheld or
exempted from such accounts.
SECTION 5. The following shall be added as second paragraph of Sec. X424 on Taxes.
With respect to tax-exempt CTFs, individual trust and investment
management accounts established under Sec. 24 (B)(1) of R.A. No. 8424,
the bank’s trust department or investment management department shall be
responsible for obtaining the tax-exemption certifications which may be
required by the Bureau of Internal Revenue for the interest-bearing
instruments where the CTFs, individual trust funds and investment
management funds will be invested. Likewise, the banks shall ensure that
the correct amount of final tax on the interest income on the
interest-bearing instruments is withheld/deducted from the proceeds from
the CTF participation, trust or investment management account and
remitted to the Bureau of Internal Revenue in the event said tax becomes
due such as when funds are withdrawn before the required five (5) year
holding period or when corporations happen to invest in the tax exempt
trust instruments created within the purview of R.A. No. 8424.
This Memorandum shall take effect immediately.
Adopted: 3 Jan. 2000
(SGD.) RAFAEL B. BUENAVENTURA
Governor