Do Mutual Funds Have a Tax Advantage Over UITFs?

DEAR INVESTOR JUAN

Dear Investor Juan

You didn't mention the tax on mutual fund vs uitf

In my case, Im comparing metrobank equity uitf and metrobank equity mutual fund.
Both of them have the same annual management fee, the difference would be:

1) mutual funds have entry sales load fee of 2%

2) uitf have 20% tax on profit.

My Conclusion: Assuming that the fund manager invest in the same portfolio, it is better to invest in mutual funds in the long run. Because the longer you invest (3-50 years) the more TAX you will have, while sales load fee is fixed.

Please clarify.

Anonymous


Dear Anonymous,

Thanks for your question.

It is true that any gains from the redemption of mutual fund shares are not subject to further taxes as stated in the National Internal Revenue Code of 1997. And since UITFs, which were only created through a BSP circular in 2004, are not explicitly covered by this provision, some speculate that gains from redeeming UITF units are subject to withholding tax on top of taxes paid on income earned by the fund's underlying assets.

First, even if UITF unit holders have to pay withholding tax upon redemption, what you suggest, that "the longer you invest (3-50 years) the more TAX you will have," is completely inaccurate since a unit holder would only have to pay withholding tax only when he or she chooses to redeem units and the tax amount is therefore independent of how long the unit holder's chooses to hold on to his or her units.

Second, according to this press release by Punongbayan and Araullo--one of the country's biggest public accounting firms--gains on UITF redemption are NOT subject to withholding tax. And I quote:

Our understanding of the nature of UITFs is that they are considered as revocable trusts since the beneficial ownership in a UITF is maintained with the trustor-beneficiary, and considering that in case of death of the trustor, the UITF participation forms part of the trustor’s estate subject to estate tax.

As revocable trusts, UITFs should be treated as one and the same taxable entity as that of the trustor.  Following the rules promulgated under BIR Ruling No. 003-05, if the applicable taxes have already been paid on the UITF investments, there should no longer be a need for the trustees of UITFs to withhold a 20% final withholding tax on the gains upon redemption of UITF participation.  Thus, proceeding from the above discussion, it is maintained that there should be no need for separate tax to be imposed upon redemption of UITF participation since the proper taxes have already been collected through the final withholding tax system. (Emphasis is mine.)

So to answer your question--NO, mutual funds do not have a tax advantage over UITFs, and given the same management fees, typical UITFs are more inexpensive than front- or back-loaded mutual funds.

I hope you find this helpful. Good luck!