SECTION 22(FF) of the National Internal Revenue Code (NIRC) of 1997, as amended, states that the term “long-term deposit or investment certificate” 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 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 P10,000 and other denominations as may be prescribed by the BSP.
Interest income derived from long-term deposit or investment certificate mentioned above shall be exempt from tax subject to the requisites provided under Sections 24(B)(1) and 25(A)(2) of the NIRC of 1997, as amended. Said provisions stated that should the holder of the certificate preterminate the deposit or investment before the fifth year, a final tax of 5 percent, 12 percent, or 20 percent shall be imposed on the entire income, and shall be deducted and withheld by the depositary bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity. In other words, deposits or investments with maturity period below five years or preterminated before the fifth year shall be subjected to tax.
Correspondingly, Revenue Memorandum Circular (RMC) 7-2015 reiterates the tax treatment of interest income derived from long-term deposits or investment certificates as defined under Section 22(FF) of the NIRC of 1997, as amended. According to RMC 7-2015, in order for the interest income from long-term deposit or investment in the form of savings, deposit substitute, individual trust fund (ITF), common trust fund (CTF), investment management accounts (IMA) and other investments evidenced by certificates in such form prescribed by the BSP to be exempted from income tax, the following characteristics or conditions must be present:
First, the depositor or investor is an individual citizen (resident or nonresident) or resident alien or nonresident alien engaged in trade or business in the Philippines.
Second, the long-term deposits or investment certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department or unit of the bank.
Third, the long-term deposits or investments must be in the form of savings, deposit substitute, individual trust fund, common trust fund, investment-management account, and other investments evidenced by certificates in such form prescribed by the BSP.
Fourth, the long-term deposits or investments must be issued by banks only and not by other entities or individuals.
Fifth, the long-term deposits or investments must have a maturity period of not less than five years.
Sixth, the long-term deposits or investments must be in denominations of P10,000 and other denominations as may be prescribed by the BSP.
Seventh, the long-term deposits or investments should not be terminated by the original investor before the fifth year, otherwise they shall be subjected to the graduated rates of 5 percent, 12 percent, or 20 percent on interest income earnings.
And eighth, except those specifically exempted by law or regulations, and other income, such as gains from trading, foreign-exchange gain shall not be covered by income-tax exemption.
However, to make things more interesting, RMC 7-2015 provided that for interest income derived by individual investing in ITF, CTF, or IMA to be exempt from income tax, the following additional characteristics and conditions must all be present:
First, the investment of the individual investor in the ITF, CTF, or IMA must be actually held and managed by the bank for the named individual at least five years without interruption. The term “bank” referred to herein are banks duly licensed as such by the BSP.
Second, the underlying investments of the ITF, CTF and IMA must comply with the requirements of Section 22 (FF) of the NIRC of 1997, as amended, as well as the requirements mentioned above.
And third, the ITF, CTF, or IMA must hold on to such underlying investment in continuous and uninterrupted period for at least five years.
Meaning, for ITF, CTF and IMA, it is not enough that an investor places his investment therein for a period of five years for his interest income to be exempt from tax. The underlying investments made by said ITF, CTF and IMA must also be for a period of five years to comply with the requirements. Absence of said requirement will make an investor liable to tax.
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The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of World Tax Services (WTS) Alliance.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at erwin.esquivel@bdblaw.com.ph or call 403-2001, local 313.