(Article published in the Nov 2,2005 issue of Manila Standard Today)
key to finding the common ground, and thus averting a conflict between the
trust industry’s understanding of the tax exemption granted to long-term
deposit or investment certificates and Bureau of Internal Revenue’s
revised position in Revenue Ruling No. 003-05, which departed from its
previous rulings, is the pragmatic legal principle that revenue rulings
are to be applied prospectively if not favorable to the taxpayer.
real world context of Revenue Ruling No. 003-05 was, after all, the
practical difficulty of the National Treasury, which had its beginnings as
early as the time of Sergio Edeza, in projecting the expected cash flow
from its issuance of treasury bills and other government securities, most
of which have tenors of less than five (5) years.
It was nightmarish for the National Treasurer to be confronted,
after he has accepted the bids, by the fact that some winners of his
conducted biddings were tax-free simply because the bidders were
representing funds claiming exemption under the Tax Code or some special
was therefore almost out of self-defense that he required those claiming
tax-exemption for their funds to submit updated certifications from the
BIR. This worked well for qualified retirement funds where law and
practice demanded periodic reassessments, after which
tax exemption certificates are issued by the Bureau as assurances
of continued qualification for tax exemption.
then, as early as 24 July 2001, Commissioner Rene Bañez, a former student
of mine at the Ateneo Law School, ruled, in an opinion addressed to
Clarissa Ocampo, made famous by her “Jose Velarde” testimony at the
impeachment trial of former President Joseph Estrada, that “the issuance
of a tax exemption certificate is not necessary”.
How then was the poor, in more sense than one, National Treasurer
to know if a bidder at the time of bidding is really exempt?
Surely, in a job where costs and cash are reckoned daily, a more
than one-year old ruling of tax-exemption is a mere historical document.
situation resulting from the response in Revenue Ruling No. 003-05, which
simplistically says that the bidding common and trust funds and other
fiduciary accounts, though long-term, are not themselves the persons
granted the exemption, does not necessarily, to my mind, pose an
insurmountable problem for both the trust industry and the Bureau of
Internal Revenue. If a descent is made from stratospheric theory to
practical groundwork, an acceptable modus
vivendi, though uneasy, can be forged.
biggest bidders affected by Revenue Ruling No. 003-05 are common trust
funds (CTFs) established right after the effectivity of the Tax Reform Law
by trust entities precisely to enable their clients to avail themselves of
the newly granted tax-exemption for long-term savers. But CTFs as they
were then known and until about the second quarter of 2004 are now a breed
03 September 2004, the Bangko Sentral ng Pilipinas (BSP) issued Circular
No. 447 governing the creation, administration, and investments of
Unit Investment Trust Funds (UITFs).
IUTFs are essentionally CTFs, but are required to establish the
value of their investors’ participations by marking to market the
investments held by the funds. CTFs were told by the BSP to convert
themselves, after a brief transitory period that ends in September of 2006
for regular CTFs and three years later for tax-exempt long-terms CTFs,
into UITFs. The
circular also required the BSP’s approval of the reformatted UITFs.
on 11 August 2005, BSP Deputy Governor Nestor A. Espenilla, Jr. clarified
in a Circular Letter to trust entities that “UITFs created under
Circular No. 447 shall not include long term funds designed for the
primary purpose of availing [themselves] of the tax incentives/exemptions
under Section 24(B)(1) of R.A. No. 8424 (The Tax Reform Act of 1997).”
essential to the tax exemption, as provided by Section 22(FF) of the Tax
Code, is that the “certificate” be in a form prescribed by the BSP,
and, since at least for the time being the BSP is not approving any UITFs
designed for tax-exemption, then there will be less and less long-term
CTFs bidding for government securities.
In fact, all that National Treasurer Omar Cruz needs to do, as I
understand he had already began to do,
to avoid the Edeza headache at this time is to exclude long-term
CTFs from his bidding of government securities.
The system is awash with cash, anyway, and so the pricing of
government securities will not be driven upwards.
And the long-term CTF, deprived of reproductive potency by the BSP
and denied daily nutrition by the National Treasury, is certain, if I may
borrow from Karl Marx, to “wither away”.
the pressure off National Treasurer Omar Cruz, it now only remains for BIR
OIC Jose Mario C. Buñag to answer the question of what to do with the
income of current investments in government securities of various
long-term CTFs whose interest income were not subjected to the 20%
withholding tax on the basis of the rulings of his predecessors in office.
I may hazard a guess of what my law school class’ valedictorian will do,
the current long-term CTFs which almost uniformly are addressees
of the “no-need of tax exemption certificate” rulings prior to
Rev. Ruling No. 003-05 will, most likely, be left alone as they are.
I do not think the BIR will go after the tax entities for the tax
that the National Treasurer did not withhold.
the first place, BIR OIC Buñag, prior to his recruitment into the public
service, was tax practioner Buñag. He
knows how much faith taxpayers put in rulings of the Commissioner and the
severe discomfort of the private sector when informed of changes of
interpretation by the taxing authorities.
Thus, he would very likely limit the application of Revenue Ruling
No. 003-05 prospectively and, despite the pressure on him to increase tax
collections, with a dose of liberality in favor of the taxpayer.
the law (and this buttresses the trust industry’s argument that it is
the relationship with the
bank that is the determinative factor in the enjoyment of the tax
exemption for long-term investments) appointed the issuer-bank or trust
entity as the tax system’s gate keeper.
And this role, the trust entities have been performing well.
if some investors in the currently existing long-term CTFs that had
government securities the interest on which were not subject to
withholding, were to terminate their participation in the funds, the
issuer-banks would have to withhold and remit to the BIR the proper tax
based on the schedule of diminishing rate prescribed by law.
Thus, even if the long-term CTFs had invested in less than five(5)
year treasury bills and other government securities, and even if, further,
no tax were withheld on their interest by the National Treasury upon
issuance, the untaxed income, when distributed to investors
pre-terminating their participations in the long-term CTFs would be
subjected to the right tax anyway upon their withdrawal from the funds.
other words, the appointment of the issuer-bank or trust entity as
withholding agent, coupled with the real world fact that universally the
CTFs are all made up of participating trusts that are revocable, insured
that, following the correct characterization of revocable trusts as
“pass through entities”, the tax which was not collected (on the basis
of previous rulings) when the government securities were issued to the
CTFS would nevertheless be collected from the withdrawing investors
themselves. No harm, no foul.
No tax is lost by the government.
residue of income still within the long-term CTFs, belonging to the
investors who really stay for five years, would then be the only interest
that remains to date untaxed. But
then, these investors ought not be punished for taking the government’s
word for it. In good faith, they relied on the text of law and the
interpretation of the tax authorities.
While the government is not estopped by the mistakes of its agents,
assuming Buñag’s predecessors were wrong, it is nevertheless governed,
as it consistently professes, by basic decency.
My bet is that Buñag will not move against them.
I surmised about the long-term CTFs, I also guess, mutatis
mutandi, with respect to the long-term individual accounts, such as
the Revocable Trusts and the Investment Management Accounts.
They will be left alone.
By dint of sheer good luck (if I may be redundant), not uncharacteristic of the current administration, a battle royale need not be fought today on the issue of what constitutes, for trust and other fiduciary arrangements, the “long-term investment certificate”. That question can wait, while we all, in the meantime, focus our efforts in keeping our ship of state on even keel.