TOAP clarifies ruling on UITF

The Trust Officers’ Association of the Philippines (TOAP) said that gains arising from redemption of unit investment trust fund (UITF) participation are not subject to a final withholding tax.

In a position paper, the TOAP said the Bureau of Internal Revenue (BIR) Ruling No. 003-05 stated that the final tax withheld on interest income payments to the trust fund is distinct and separate from the tax on the income derived by the individual investor, it qualified that this is only applicable to irrevocable trusts.

For revocable trusts, said ruling specifically provided that it is "only a pass thru entity, and is not for tax purposes, separate from those who establish or create it by pooling their money for the purpose of investment or reinvestment."

Thus, said ruling made it clear that there is a different tax treatment for revocable and irrevocable trusts.

For irrevocable trusts, the taxability of the trust itself is separate from the taxability of the individual investor, while for revocable trusts, the trust is a pass thru entity and the taxability of the trust is the same as the investor.

Per the TOAP paper, UITFs are revocable trusts.

The trustor/investor has the absolute power and control over his participation. There are no beneficiaries separate from the trustor and when the trustor/investor dies, his UITF participation forms part of his estate and therefore subject to estate taxes.

It continued that to tax the gains arising from redemption of UITF participation will run counter to Section 63 of the Tax Code which provides for the taxation treatment of revocable trusts. It will likewise result to double taxation.

TOAP members who are basically trust department of commercial banks received recently a letter from the Bangko Sentral ng Pilipinas (BSP). The letter took note of certain tax issues related to the UITFs.

The UITFs became the object of controversy as huge redemptions or withdrawals caught the attention of regulators.

The BSP letter cited BIR Ruling 003-05 wherein it was stated that the final tax withheld on interest income payments to the trust fund is distinct and separate from the tax on the income derived by the individual investor and that the trust and its investors are separate taxable entities.

The TOAP position paper said the BIR ruling stated that the final tax withheld on interest income payments to the trust fund is distinct and separate from the tax on the income derived by the individual investor, it qualified that this is only applicable to irrevocable trusts.