Clarification on the taxation of long-term deposits

This Circular was issued to clarify the provisions of RR 14-2012 on the proper tax treatment of interest income from long-term deposits. The highlights of some of the issues and/or clarifications discussed in the Circular are as follows:

1. On investments of individuals in long-term trust invested by a bank’s trust department in a five-year corporate bond

Even if the individual does not withdraw his money from the trust agreement for at least five years, his interest income from the trust agreement will not be exempt from the final withholding tax as the underlying instrument is a corporate bond, even if such corporate bond has a maturity of five years. Corporate bonds or any other debt instrument issued by a non-bank corporation as underlying instrument will not meet the requirements of Section 22(FF) of the Tax Code since it is not issued by a bank.

2. On investments of individuals in long-term trust invested in long-term deposits placed under name of a bank’s trust department

If a bank’s trust department invests a fund in a long-term deposit or investment certificate in its own name without mentioning the particular individual for whom the investment is being made, this long-term deposit and investment are not exempt from the 20% final withholding tax. Only those made specifically in trust for the name of specific qualified individual investors may be exempt from income tax under the Tax Code.

3. On the tax treatment of investments of individuals in a long-term deposit or investments with remaining maturity of less than five years

The individual depositor or investor who acquired the instrument shall be subject to 20% final withholding tax on his interest income because the remaining maturity period is less than five years.

4. On the applicable tax rate in case of long-term deposits that have original tenor of more than five years but eventually held for less than five years upon exercise of call option

The individual depositor or investor who acquired the instrument with a maturity period of more than five years but eventually held the same for less than five years upon exercising his call option shall be subject to the graduated income tax rates of final withholding tax applicable to pre-terminated long-term deposits.

5. On the effectivity date of RR 14-2012 pertaining to the exemption of long-term deposits

Since RR 14-2012 merely implements, among others, the existing provisions of the Tax Code on long-term deposits, it shall apply to the following:

a. All pre-terminations/transfers, sale or acquisition of current outstanding long-term deposits or

investment certificates and new issues

b. All the interest coupon payments of current outstanding long-term deposits or investment certificates, as may be applicable, and new issues

c. All current outstanding underlying investments of investment certificates in the form of common or individual trust funds or investment management accounts and new issues upon the effectivity of the RR 14-2012 on November 23, 2012

(Revenue Memorandum Circular No. 81-2012, December 11, 2012)

Tax Brief – January 2013

Punongbayan and Araullo