On December 11, the Bureau of Internal Revenue released Revenue Memorandum Circular (RMC) No. 81-2012, which includes supplementary clarifications regarding the tax exemption of long term investments as stated in the National Internal Revenue Code (NIRC) of 1997.
The memorandum cites a section from Revenue Regulation No. 14-2012, which lists conditions/characteristics required for the tax exemption of long-term investments:
1. The depositor or investor is an individual citizen (resident or non-resident) or resident alien or non-resident alien engaged in trade in the Philippines;
2. 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/unit of the bank.
3. The long-term deposits or investments must be in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP);
4. The long-term deposits or investments must be issued by banks only and not by other financial institutions;
5. The long-term deposits or investments must have a maturity period of not less than five (5) years;
6. The long-term deposits or investments must be in denominations of Ten Thousand Pesos and other denominations as may be prescribed by the BSP;
7. 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%, 12% or 20% on interest income earnings; and
8. Except those specifically exempted by law or regulations, any other income such as gains from trading, foreign exchange gain shall not be covered by income tax exemption.
RMC No. 81-2012 adds that for interest income derived by individuals investing in common or individual trust funds or investment management accounts to be exempt from income tax, the following characteristics/conditions must ALL be present:
1. The investment of the individual investor in the common or individual trust fund or investment management account must be held/managed by the bank for at least five (5) years;
2. The underlying investments of the common or individual trust account or investment management accounts must comply with the requirements of relevant portions of NIRC of 1997, as well as the requirements mentioned above;
3. The common or individual trust account or investment management account must hold on to such underlying investment for at least five (5) years.
So what does this mean for investors? What's clear is that investments in corporate and treasury bonds, even if held for 5 years or more, are not tax exempt. But according to my bank contact, it's not clear to them which particular securities "long term deposits or investments issued by banks" include. Additionally, the lower effective coupons (from taxes) may offset bond price gains from lower interest (due to the recent credit rating upgrade for the Philippines) enough to result in lower bond yields.