BIR Ruling

August 23, 1976 Qantas Airways Limited 1148 Roxas Boulevard Manila Attention: Mr . H . D . Mitchell Superannuation Controller Gentlemen : This refers to your letter dated June 4, 1976, requesting advise on how to secure approval of the retirement plan of that airline and posing the following queries: cdt "1. Must the funds be maintained separately and invested in the Philippines? "2. Can the funds be reinvested in the Company? "3. If these funds can be invested with the company, what are the requirements and conditions for your approval in respect of creating a separate fund? "4. Are there any specific requirements concerning the types of investments and if so please supply details? "5. Must we provide actuarial certificates and if so how often? "6. If actuarial certificates are required, what qualifications must the actuary possess? "7. Is it necessary to provide a separate book of rules as all benefits and conditions are fully set out clearly in the agreement attached? "8. Must there be a new and separate Trust Deed created? "9. If a Trust Deed is created can the parties to this document be firstly the Company and secondly say the Manager Philippines and Director of Personnel in Australia who are third parties and have no vested interest in the Plan? "10. The Plan commenced on 1st August 1961 and we should be pleased if you would advise on what date you would apply your approved status? cdta "11. Any other relevant advice on specific action required to meet your approval would be appreciated." In reply, I have the honor to inform you as follows: Re: Question No. 1 The trust fund for the local Qantas staff employed in the Philippines must be maintained, administered and invested separately and independently from that of your foreign office personnel. A foreign trust cannot qualify for tax-exemption under Republic Act No. 4917 as amplified by Revenue Regulations No. 1-68 because a qualified employees' trust under the aforesaid Act is one which is organized or created in the Philippines as part of a pension, stock bonus or profit sharing plan of an employer for the benefit of some or all of his employees, and maintained at all times as a domestic trust. In other words, in order to be qualified as an employees' trust under Republic Act No. 4917, the Retirement Plan for your Philippine Office personnel must, among others, be organized or established separately and maintained at all times in the Philippines and the entire retirement fund created to implement the provisions of the said plan must be invested and administered by a trustee or trustees whose residence is in the Philippines. Re: Questions Nos. 2 to 4 If the domestic employees' trust meets the requirements of Republic Act No. 4917 as implemented by Revenue Regulations No. 1-68, the trustees may invest some or all of the trust funds or assets in your company without losing its tax-exempt status provided that in such investment activity said funds are not actually used or diverted to purposes other than for the exclusive benefit of the employees or their beneficiaries, and title to such assets is vested at all times in the trustees of the domestic trust which has the exclusive management and control of the entire trust fund and is required to withhold tax from taxable distributions. (B.I.R. Ruling No. 67-032 dated September 11, 1967) There are no specific limitations with respect to investments which may be made by the trustees of an employees' trust. Generally, the fund may be used by the trustees to purchase any investments permitted by the trust agreement. However, the exemption of the trust income under Section 56(b) of the National Internal Revenue Code, as amended, may be denied if the trust (a) lends any part of its income or corpus without adequate security and a reasonable rate of interest; (b) pays any compensation in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered; (c) makes any part of its services available on a preferential basis; (d) makes any substantial purchase of securities or any other property for more than adequate consideration in money or money's worth; (e) sells any substantial part of its securities or other property, for less than an adequate consideration in money or money's worth; or (f) engage in any other transaction which results in a substantial diversion of its income or corpus, to or from the employer or, if the employer is an individual, to or from a member of the family of the employer, or to from a corporation controlled by the employer through the ownership, directly or indirectly, of 50% or more of the total combined voting power of all classes of stock entitled to vote or 50% or more of the total value of shares of all classes of stock of the corporation. (Sec. 5 Rev. Reg. No. 1-68 dated March 25, 1968) The primary purpose of benefiting employees or their beneficiaries must be maintained with respect to investments of the trust funds as well as with respect to other activities of the trust. This requirement, however, does not prevent others from also deriving some benefit from a transaction with the trust. For example, a sale of securities at a profit benefits the seller, but if the purchase price is not in excess of the fair market value of the securities at the time of the sale and the applicable investment requisites set forth below have been met, the investment is consistent with the exclusive benefit-of-employees requirement. The requisites are: 1. The cost must not exceed fair market value at the time of purchase; 2. A fair return commensurate with the prevailing rate must be provided; 3. Sufficient liquidity must be maintained to permit distributions in accordance with the terms of the plan; and 4. The safeguards and diversity that a prudent investor would adhere to must be present. However, the requirement set forth in item (2) with respect to a fair return is not applicable to obligatory investments in employer securities in the case of a stock bonus plan. (See Rev. Ruling 69-65, I.R.B. 1969-7, 9 (modifying Rev. Rul. 57-372, 1957-2 CB 256), par. 2607.70 CCH 870 Vol. 3) Re: Questions Nos. 5 to 11 Being a foreign trust, your present retirement plan cannot qualify for tax-exemption under Republic Act No. 4917 as amplified by Revenue Regulations No. 1-68. Accordingly, the retirement benefits paid by your company to all your Philippine Office personnel retiring under your present retirement plan which, as represented, is a non-contributory plan organized, created and maintained in your Home Office at Sydney, Australia, effective August 1, 1961, with the entire retirement fund being invested, administered and set aside as a reserve in Sydney, Australia, are subject to Philippine income tax and consequently to the withholding tax prescribed by Revenue Regulations No. V-8-A as amended. In order that your retiring Philippine Office employees, who meet the qualifications provided for in the law, may avail of the tax-exemption benefit under Republic Act No. 4917, you must submit to this Office the following documents: (1) a copy of the written program constituting the Retirement Plan separately maintained and established for your Philippine Office personnel; (2) copy of a separate Trust Agreement executed by and between Qantas Airways Limited (Phil.) and the trustees of the Qantas Airways Limited (Phil.) employees retirement fund, duly signed by the parties to the said trust and acceptance by the trustees indicated. The individual trustees of the retirement fund must be residents of the Philippines. Hence, the manager of your Philippine Office may qualify as one of the said trustees. A domestic Corporation authorized to transact business as a trust corporation under Republic Act No. 337, otherwise known as the "General Banking Act", may also act as trustee of said trust fund; (3) Statement of actuarial assumptions or valuations duly certified to by an independent consulting actuary who must be a fellow of the Actuarial Society of the Philippines; and (4) a duly accomplished B.I.R. Form No. 17.60. Unless the aforementioned documents and/or papers are submitted, no determination of the qualification of the said Plan can be made by this Office. Once approved, the incidence of such approval shall retroact to the date of effectivity of the Qantas Airways Limited (Phil.) employees Retirement Plan. In other words, the Retirement Plan as well as the covered employees shall be entitled to all the benefits and privileges provided for by Republic Act No. 4917 as of the date of effectivity of the said Plan. aisa dc Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."