BIR Ruling [DA-117-04]

March 16, 2004 BIR RULING [DA-117-04] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. E. C. Alcantara Gentlemen : This refers to your letter dated January 29, 2004 stating that Fairchild Semiconductor Hong Kong (Holdings) Limited (FSHHL-HK) is a corporation duly organized and existing under the laws of Hong Kong with principal office at 19/F., CMG Asia Tower, The Gateway II, 15 Canton Road, Tsimhatsui, Kowloon, Hong Kong; that it is duly licensed to transact business in the Philippines through its branch office, Philippine Branch; that the Philippine Branch is registered with the then Export Processing Zone Authority (EPZA) now Philippine Economic Zone Authority (PEZA), under a Registration Agreement (RA) dated April 10, 1979, as a manufacturer of semiconductor products; that the PEZA operations of the Philippine Branch are located in the Mactan Economic Zone (MEZ) in Cebu; that the Philippine Branch maintains an employee retirement plan, which the BIR has adjudicated to be a reasonable retirement benefit plan under Section 32(B)(6)(a) of the Tax Code of 1997; that on March 7, 1997, the Securities and Exchange Commission (SEC) approved the amendment to the Articles of Incorporation of National Semiconductor (HK) Distribution, Ltd. by changing the name of the corporation to Fairchild Semiconductor Hong Kong (Holdings) Limited Philippine Branch; that subsequently, FSHHL-HK has reorganized its Philippine operations by creating a wholly-owned Philippine subsidiary, FSPI, a corporation duly organized and existing under and by virtue of Philippine laws, that would undertake the business operations of FSHHL-HK in the Philippines; that in PEZA Board Resolution No. 03-169 issued on June 25, 2003, the PEZA approved the transfer to FSPI of the operations, incentives, assets and liabilities and all the rights and obligations arising under the PEZA-registered activities of Philippine Branch as provided under the RA with the EPZA, now PEZA; that as a result of the transfer, FSPI became entitled to all the incentives previously granted by the PEZA to Philippine Branch, including all its related rights and obligations under its RA dated April 10, 1979, which incentives include the imposition of a preferential tax rate of 5% on gross income earned by Philippine Branch within the MEZ; that on October 1, 2003, FSHHL-HK entered into an Assignment Agreement (Agreement) with FSPI, whereby FSHHL-HK transferred all of the assets and liabilities, including the employee retirement plan of Philippine Branch in exchange for shares of stock of FSPI; and that said Agreement provides that as of October 1, 2003, all of the Philippine Branch's employees will be absorbed by FSPI without any change in the employee's security of tenure, salary, position, seniority and benefits. In connection therewith, you now request for a ruling that "1. The transfer by FSHHL-HK to FSPI of the Employee Retirement Plan of Philippine Branch will not affect the tax-exempt qualification of said retirement plan under Section 32(B)(6)(a) of the Tax Code of 1997; and "2. The fund created to implement the provisions of the Retirement Plan, as well as the retirement pay received by the qualified member-employees remain exempt from the payment of taxes." In reply thereto, please be informed that this Office in BIR Ruling No. 049-97 dated April 14, 1997 had occasioned to rule on the matter, when it said that ". . . since the foregoing reorganization and consequent succession by SBRL as the employer of what used to be the SPII Retirement Plan are not prejudicial to the employee-members of the existing SBRL Retirement Plan and to the absorbed employee-members of what used to be the SPII Retirement Plan, they will not affect SBRL Retirement Plan's qualification under Republic Act No. 4917 [now Section 28(b)(7)(A) of the Tax Code as amplified by Revenue Regulations No. 1-83] and therefore, the fund created to implement the provisions of the plan and the retirement pay to qualified retirees remain exempt pursuant to said law as decided in BIR Ruling No. DA201-96 dated June 18, 1996. "In addition, pursuant to Section 53(b) of the Tax Code, as amended [now Section 60(B) of the Tax Code of 1997] the 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 shall be exempt from tax, . . . . "Considering finally, that pursuant to the reorganization SBRL, shall absorb the SPII employees and operations and that all assets of SPII, including its leasehold rights on land owned by the SPII Retirement Plan will be transferred to SBRL in liquidation, and SPII will be dissolved and liquidated, SBRL will be constituted as the successor corporation, SPII having been dissolved and liquidated. "Accordingly, your following opinions are hereby confirmed, to wit: "1. SBRL can succeed, although temporarily as employer in the SPII Plan to effect the smooth transfer of SPII employees and their actuarial accrued benefits to the SBRL Plan; "2. The SPII Retirement Plan, when taken over by SBRL as successor employer, will maintain its tax exempt status, and the sale by the SPII Plan Trustee of the land and the leasehold rights therein is exempt from tax; "3. The transfer of the actuarial accrued benefits of the SPII employees to the SBRL is exempt from tax; and "4. The excess funds of the SPII Retirement Fund, including the proceeds from the sale of the land the leasehold rights thereon, after the transfer of the actuarial accrued benefits of the employees to SBRL Retirement Plan, and paying off other liabilities of the SPII Retirement Plan will revert to SBRL as successor or employer and taxable to SBRL and not SPII." Considering that the instant case is similar in all fours to the above-cited case, this Office holds that the transfer of the Philippine Branch's Retirement Plan to FSPI will not affect the tax-exempt qualification of the said plan as a reasonable retirement benefit plan within the contemplation of Section 32(B)(6)(a) of the Tax Code of 1997, since the transfer is merely a necessary consequence to the change in the form of the operating and registered entity. Accordingly, the fund created to implement the provision's of the retirement plan as well as the retirement pay received by the qualified member-employees remain exempt from the payment of income tax and consequently from withholding 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. EHSTDA Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service