trustestatelogoa.jpg (8498 bytes)


Lectures &

News $ Views

Law &



Trust Products
& Practice

About the Guru


Email Feedback

Guest Register









TINgling among the trustees

(Article published in the July 1, 2002 issue of TODAY, Business Section)

Tingling sensation in the spinal area is what trustees are feeling nowadays. Reason? The Bureau of Internal Revenue recently required the trust department of banks to register and get a tax identification number (TIN) for the irrevocable trusts (or their equivalent) under their management or administration. By itself, the requirement seems innocuous enough and easy to comply with. Nevertheless, this new initiative from Rene Baņez sends the clear signal that, at long last, the tax authorities are in a mood to seriously scrutinize the way trust departments interpret and comply with the tax responsibilities of their trust clients.

The legal basis for requiring the TIN for irrevocable trusts is clear and unequivocal: Section 236 (A) of the Tax Code requires all persons subject to tax to each get a TIN. Some trusts, such as irrevocable trusts, are considered as taxable "persons," even if the Civil Code does not give a trust a legal personality of its own. Therefore, those trusts must be registered and be given a TIN. Compliance is not too difficult. All the trust departments have to do is supply the relevant information and the revenue authorities having jurisdiction over them will forthwith give out the TIN.

what.gif (625 bytes)

A lot actually. First of all, notice how the requirement was worded? Irrevocable trusts and their "equivalents." These "equivalents" include a number of things, among them, (a) estates of deceased persons which the trust department manage under court order as administrator, executor, or administrator c.t.a. (cum testato anexo); (b) estates of minors of which the trust departments are court-appointed guardians; (c) reversionary trusts, or those which for a period of time are like irrevocable trusts, but revert to the trustor after a stated time, known in the United States as the Clifford Trust; (d) accumulation trust where the income is kept for future distribution tot he beneficiary; and (e) discretionary trusts where the trustee is given discretion to decide whether to distribute income in the year that the income is earned or accumulated it for distribution to the beneficiary of a later time. At the very least, the new requirement ferrets out heretofore hidden taxpayers.

Second, a TIN for each trust will force compliance with the standard duties of earmarking trust property (in order to make them identifiable and separable from the property of the general business of the trustee as well as from the property of other trusts) and maintaining separate books of account and making detailed financial statements for each trust. To cope with the resulting paperwork and manage the information flow, the trust departments which have not yet done so would have no choice but to computerize.

Third, the practice of some banks commingling funds of various trust accounts and investing them in a single transaction (such as jumbo loan given to a corporate client), without benefit of a formal common trust fund (which requires Bangko Sentral approval) will become, to say the least, unwieldy. For example, when the corporate borrower pays interest, who will it record as the payee? Up to recently, the practice was to record a payment to the bank (without or without indication of its capacity as trustee). But under the new requirements, the corporate borrower would have to name and, presumably indicate the tax identification number, of each trust lender. Otherwise, the corporate borrower would not be able to document its interest payment and lose the benefit of deductibility.

Fourth, the ticklish issue of the taxation of common trust funds will have to be faced sooner or later. Early American cases, which were decided when the law in the United States was similar to the law that we have now, took the view that a common trust fund sought to be taxed like a corporation, i.e. an entity taxable as a person separate from the tax liability of its stockholders. If that were to be followed, then there would be, to the delight of the mutual fund industry, the same two-tier taxation of trusts invested in a common trust fund, one tax on the fund itself and another on the share of each of the participating trusts.

That view, of course, is erroneous. In my view, the proper way to look at a common trust fund is to consider it in the same manner that we tax co-ownerships. It is simply an investment vehicle and should be considered a "flow-through" entity. The tax should be only on the participating trusts. But then, it is not I but my former student who is commissioner of Internal Revenue. Former students, as Aristotle did with Plato, have been known to disagree with their mentors and the huge shortfall in internal revenue tax collections just might provide the incentive for Baņez to take a position contrary to mine.

But not everything is dour, for the trust industry, however. If the TIN requirement is just the proverbial tip of the iceberg, the iceberg being the serious attempt to rationalize the taxation of trusts, then it could lead to the issuance of clarificatory regulations on certain "gray" areas. A nasty issue, for instance, is when income from a trust is subject to the final tax of 20 percent (income from the trust in the regular books) or 7.5 percent (from the FCDU books) and when such income is treated as part gross income.

For now, the trust departments would have to wait and see. Better still, they should as an industry be proactive, and, like the Tax Management Association of the Philippines, meet with the commissioner, show that they are prepared to assist him to collect the right amount of tax from their clients, and make their position known aggressively and emphatically. He will listen, I know that.