BIR Ruling [DA-078-99]

February 8, 1999 BIR RULING [DA-078-99] Mitsubishi Motors Philippines Ortigas Avenue Extension Cainta, Rizal Attention: Ms . Carmencita M . Lapat Gentlemen : This refers to your letter dated December 8, 1998 requesting for a ruling that the distribution by the Provident Fund to its member-employees of the amounts representing the contributions made by the employer and member-employees of the Provident Fund does not constitute income to the recipient employees and therefore not subject to income tax nor withholding tax. It is represented that in January 1974, Canlubang Automotive Resources Corporation (now Mitsubishi Motors Philippines Corporation) with address at Ortigas Avenue Extension, Cainta, Rizal created a Retirement Plan Program known as Chrysler Philippines Corporation Retirement Plan; that on January 6, 1988, the Plan was renamed Philippine Automotive Manufacturing Corporation Retirement Plan; that the aforementioned retirement Plan was registered under R.A. No. 4917 and was determined as a reasonable private benefit plan; that seriously affected by the current Asian economic crisis, Mitsubishi Motors Philippines Corporation had incurred huge losses without any prospect of early recovery; that under this situation, your company has decided to discontinue its "counterpart additional contribution to the Provident Fund and eventually terminated the Provident Fund on November 1, 1998; that the funds were kept for twenty-four (24) years, and were respectively distributed to the member-employees, net of withholding tax on compensation; that deeply saddened by this development, your member-employees have been morally depressed as they considered Provident Funds their lifetime savings which will take care of them during retirement period or separation from employment; that your company has continuously been implementing cost reduction measures and reduced working hours/days and temporary lay-offs for six months; and that 581 employees have been retrenched in April 1998, and 280 more employees were scheduled to be retrenched until December 1998. prcd In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, any amount received by an official or employee or by his heirs from the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee is exempt from income tax regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The above-mentioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of your retrenched employees is beyond their control, any and all amounts (including their personal contribution to the Fund and the counterpart contribution, of the employer), received by them as a result thereof, are exempt from all taxes and consequently, from withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997. It is however, understood that this exemption does not include payments of their salaries. (BIR Ruling No. 014-93 dated January 15, 1993) On the other hand, Section 36 of the Income Tax Regulations provides that income in the broad sense, means all wealth which flows into the taxpayer other than a mere return of capital. Such being the case, any and all amounts which represent a return of the personal contributions of the employees to the Fund, who are still in the active service of Mitsubishi Motors Philippines Corporation, shall not be subject to income tax, since the same are considered as mere return of capital. However, the income or earnings derived from the personal contributions by the employee-members' who will not be retrenched are subject to income tax since in a retirement plan under R.A. No. 4917 [now Section 32(B)(6)(a) of the Tax Code of 1997], the employer, or officials and employees or both, contribute to a trust fund for the purpose of distributing to such officials and employees or their beneficiaries, the corpus and income accumulated by the trust in accordance with the plan. Section 2(d) of Revenue Regulations No. 1-68, as amended, provides for exemption from income tax only the benefits received by officials or employees upon retirement, in accordance with the BIR-approved Retirement Plan rules or written program. In other words, in order to be exempt from the payment of income tax, the benefits must be paid or distributed to the officials or employees upon their retirement from the service and not while they are still in the employ of the company-employer. In the instant case, the earnings/income of the personal contributions of the employees constitute benefits (not retirement benefits envisaged by the trust fund trustee to the employee) not upon their retirement but while they are still in the service of Mitsubishi Motors Philippines. Consequently, pursuant to Section 60(B) of the Tax Code of 1997, any and all amounts actually distributed to said member-employees over and above their personal contributions shall be taxable to them in the year in which so paid or distributed, considering that such distribution has been effected before their retirement from Mitsubishi Motors Philippines. This means that, only upon retirement , the total benefits which the employees shall receive consisting of their personal contributions, counterpart contribution of the employer and the income of the Fund to which the employees are entitled and are distributed to them shall be exempt from income tax. 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. cdpr Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group