BIR Ruling [DA-009-06]

January 17, 2006 BIR RULING [DA-009-06] Bernaldo Mirador Law Offices Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Avenue cor. H.V. dela Costa Street Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated October 7, 2002 stating that your client, Petron Corporation, has from 2001 erroneously made excess contributions to the company's Retirement Fund upon discovery through the actuarial study; that it appears that based on the Latest Actuarial Computation, Petron has exceeded its annual contribution by P680,618,500.00 as of January 1, 2002; that said Retirement Fund is presently deposited with the Bank of the Philippine Islands (the Bank); that the Bank, while agreeing to segregate the excess and transfer it to a regular Petron Corporate Account, would like to protect itself by getting a BIR Ruling to the effect that said excess shall be exempt from final withholding tax from 2001 up to the time that it was discovered that there was an excess in 2002; that the excess shall be exempt from final withholding tax since said excess amount formed part of the Petron Retirement Fund during the period 2001 to 2002; and that Petron Corporation would like to manifest its intention to withdraw the said excess payment. Based on the foregoing representations, you now request a ruling, on behalf of Petron Corporation, that the interest income arising from the excess contributions to the Retirement Plan is exempt from the final withholding tax. In reply thereto, please be informed that Section 60(B) of the Tax Code of 1997 provides that "Sec. 60(B) Exception. The tax imposed by Title II shall not apply to employees' trust which forms part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees. . ." Section 60(B), supra specifically exempted employees' trust from income tax. Since the final tax and the withholding thereof are embraced within the title on "Income Tax", it follows that said trust must be deemed exempt therefrom. Otherwise, the exception becomes meaningless. ADHCSE Similarly situated is the case of Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 95022 promulgated on March 23, 1992 , where the Court upheld the judgment of the respondent Court of Appeals in affirming the decision of the Court of Tax Appeals, which ruled ". . . it is significant to note that the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Republic Act (R.A.) No. 4917 approved on June 17, 1967. This law specifically provided: "Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action; xxx xxx xxx "And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans normally provide economic assistance to employees upon occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose. "The tax advantage in R.A. No. 1983, Section 56(b), was conceived in order to encourage the formation and establishment of such private plans for the benefit of laborers and employees outside of the Social Security Act. Enlightening is a portion of the explanatory note to H.B. No. 6503, now R.A. 1983, reading: "Considering that under Section 17 of the Social Security Act, all contributions collected and payments of sickness, unemployment, retirement, disability and death benefits made thereunder together with the income of the pension trust are exempt from any tax, assessment, fee, or charge, it is proposed that a similar system providing for retirement, etc. benefits for employees outside the Social Security Act be exempted from income taxes." ( Congressional Record, House of Representatives, Vol. IV, Part 2, No. 57, p. 1859, May 3, 1957; cited in Commissioner of Internal Revenue vs. Visayan Electric Co., et al., G.R. No. L-22611, May 27, 1966, 23 SCRA 715 ). ADcHES "It is evident that tax exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution of accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intent of the law. "xxx xxx xxx "There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56(b), now Sec. 53(b), Tax Code). The application of the withholding system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place. "xxx xxx xxx" Such being the case, interest income derived by the Petron Corporation Retirement Plan, on the excess contributions up to the date of its actuarial report on April 2, 2002, from its currency bank deposit, deposit substitutes, and investments in money market placements, is exempt from the final withholding tax pursuant to Section 60(B) of the Tax Code of 1997. On the other hand, if Petron intends to let the excess funds remain as part of its Retirement Fund, the same shall be treated as advance contributions to the Fund and therefore not taxable. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service