BIR Ruling [DA-322-06]

May 17, 2006 BIR RULING [DA-322-06] 32 (B) (6) (a); DA 117-04 SGV & Co. 8F Pryce Tower, Pryce Business Park J.P. Laurel Avenue Davao City Attention: Atty. Fabian K. Delos Santos Partner, Tax Services Gentlemen : This refers to your letter dated March 29, 2006 stating that your client, One Network Rural Bank, Inc. (ONRBI), is a corporation organized and existing under Philippines laws; that on the other hand, Network Rural Bank, Inc., Provident Rural Bank of Cotabato, Inc., and Rural Bank of Panabo (Davao), Inc. (the Constituent Banks), all corporations duly authorized by the Bangko Sentral ng Pilipinas (BSP) to operate as rural banks, has each established a trusteed and non-contributory Private Retirement Benefit Plans (PlanPlans) which are reasonable private benefit (retirement) plans within the contemplation of Section 32(B)(6)(a) of the Tax Code of 1997 and confirmed and duly registered with the Bureau of Internal Revenue (BIR) per certification/rulings issued by the BIR as follows: Network Bank Employees Retirement Plan BIR Ruling [ERP-053] dated June 6. 2001; Provident Rural Bank, Inc. Employees Retirement Plan BIR Ruling [ERP-054] dated June 6, 2001; and Rural Bank of Panabo (Davao), Inc. Employees Retirement Plan BIR Ruling [ERP-156] dated September 5, 2001. that each of the Plans have established trusteed funds, which provide the same kind of retirement, death, disability and severance benefits for all eligible employees of the Constituent Banks; that membership in each of the said Plans is automatic for all the officers and employees of the Constituent Banks who are considered having regular employment status (i.e., an employee who is under the regular payroll of the Constituent Banks on a full-time basis and is not considered a consultant, casual, contractual, or probation or project employees); that on March 12, 2004, the Securities and Exchange Commission (SEC) approved the corporate consolidation of the Constituent Banks into a new entity known as One Network Rural Bank, Inc. (ONRBI); that upon effectivity of the consolidation, ONRBI absorbed all the employees and operations, as well as the assets and liabilities, including the rights and properties in the Plan of the Constituent Banks; that as a result of the consolidation, ONRBI has succeeded as the employer of the employees of the Constituent Banks in the said Plans as if there was no interruption of their employment and that they continue to be covered in the event of retirement, separation from employment, disability or death; that as a result of the consolidation, ONRBI intends to consolidate all the retirement benefit plans of each of the Constituent Banks into one retirement benefit plan under one trustee, wherein all the employees combined will be receiving the same benefits as in the original retirement benefit plans; and that considering that the fair value of the net assets of each of the Plans, which will be transferred to ONRBI is less than the accrued actuarial benefits of the Plans, there will be no excess funds in the terminated Plans of the Constituent Banks upon the transfer of the actuarial accrued benefits of the absorbed employees to the new Plan. In connection therewith, you now request confirmation of your opinion that "1. The Retirement Plans of the Constituent Banks, when taken over by ONRBI as successor employer, will retain its tax exempt status; 2. The transfer of the accrued benefits of the Constituent Banks' employees into a single fund to be known as "One Network Rural Bank, Inc. Employees Retirement Plan" shall be exempt from tax, and in this connection the transfer of all the assets i.e., money, investments and shares of stocks held by the respective retirement funds of the Constituent Banks into the fund of "One Network Rural Bank, Inc. Employees Retirement Plan" shall be exempt from tax; 3. After transferring the actuarial accrued benefits of the absorbed employees to the new Plan, and after paying off the liabilities relative to the terminated Plans, if any, ONRBI shall not be subject to tax since there will be no excess funds arising from the transfer of the actuarial accrued benefits; EDIaSH 4. Finally, the new One Network Rural Bank, Inc. Employees Retirement Plan is a "reasonable private benefit plan" within the contemplation of Section 32(B)(6)(a) of the Tax Code of 1997 and the retirement benefits that may be received therefrom can be tax exempt." In reply thereto, please be informed that this Office in BIR Ruling No. 049-97 dated April 14, 1997 and later reiterated in BIR Ruling No. DA117-04 dated March 16, 2004 , ruled 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 provision s 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 absorbed 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 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." SUCH BEING THE CASE, this Office holds that your opinion is hereby confirmed as follows: 1. The Retirement Plans of the Constituent Banks, when taken over by ONRBI as successor employer, will retain its tax exempt status. 2. The transfer of the accrued benefits of the Constituent Banks' employees into a single fund to be known as "One Network Rural Bank, Inc. Employees Retirement Plan" shall be exempt from tax, and in this connection the transfer of all the assets i.e., money, investments and shares of stock held by the respective retirement funds of the Constituent Banks into the fund of "One Network Rural Bank, Inc. Employees Retirement Plan" shall be exempt from tax. 3. After transferring the actuarial accrued benefits of the absorbed employees to the new Plan, and after paying off the liabilities relative to the terminated Plans, if any, ONRBI shall not be subject to tax since there will be no excess funds arising from the transfer of the actuarial accrued benefits. 4. The new One Network Rural Bank, Inc. Employees Retirement Plan is a reasonable private benefit plan within the contemplation of Section 32(B)(6)(a) of the Tax Code of 1997 and the retirement benefits that may be received therefrom can be tax exempt. 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