BIR Ruling [DA-105-03]

April 1, 2003 BIR RULING [DA-105-03] 24 (B) (1) and (2) Philippine Sinter Corporation Retirement Plan 23rd Floor, 6788 Ayala Avenue Oledan Square, Makati City Attention: Mr. Onofre H. Molina Trustee Gentlemen : This refers to your letter dated November 22, 2002 requesting for an opinion as to whether income derived by the Philippine Sinter Corporation Retirement Plan (PSCRP) from its peso savings deposit and deposit substitute, expanded foreign currency deposit system, dividends from investment in shares of stock and sale of shares of stock is exempt from the final tax under Section 60(B) of the Tax Code of 1997. It is represented that the PSCRP is a BIR tax-qualified retirement plan covering all Filipino employees of Philippine Sinter Corporation; and that the fund of the PSCRP is constituted by the contributions made by PSC, together with any income, gains or profits, less expenses for administration of the fund and the PSCRP, distributions and losses. In reply thereto, please be informed that Section 60(B) of the Tax Code of 1997b provides that "Sec. 60. Imposition of Tax . "xxx xxx xxx "(B) the tax imposed by Title II of the said Code shall not apply to employee's 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) of the Tax Code of 1997 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. 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 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;" (emphasis ours). 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 Rep. Act 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: CHDTEA "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, 27 May 1968, 23 SCRA 715). "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 intendment 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" IN VIEW OF THE FOREGOING, income derived by the PSCRP from its currency bank deposit and deposit substitutes, depository bank under the expanded foreign currency deposit system, dividends from its investment in shares of stock and sale of its shares of stock is exempt from the final withholding tax respectively imposed under Sections 24(B)(1) and (2) and 24(C) of the Tax Code of 1997, as implemented by Revenue Regulations No. 10-98 and 2-98. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service