BIR Ruling [DA-354-05]

August 17, 2005 BIR RULING [DA-354-05] Bank of The Philippine Islands BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City Attention: Ms. Ma. Lourdes B. Montelibano Assistant Vice Provident Gentlemen : This refers to your letter dated December 20, 2004 requesting confirmation as to whether or not the ROMAN CATHOLIC ARCHBISHOP OF MANILA (RCAM) PRIESTS' RETIREMENT PLAN is a "reasonable private benefit plan" within the contemplation of Section 32(B)(6)(a) of the Tax Code of 1997 and consequently the retirement benefits that may be received therefrom can be tax exempt. In reply thereto, please be informed that Section 32(B)(6)(a) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended, provides that retirement benefits received under Republic Act No. 7641 and those 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 excluded from the gross income and, therefore, exempt from income tax and consequently from withholding tax. The raison d'etre behind the creation of employees' trusts or benefit plans is normally to provide economic assistance to employees upon the occurrence of certain contingencies particularly, old age, retirement, death, sickness or disability. It provides security against hazards to which members of the plan may be exposed. It is an independent and additional source of protection for the working group and is established for their (employees) exclusive benefit and for no other purpose. Such being the case, in order to be qualified as a reasonable retirement benefit plan, an employer-employee relationship must exist. The term "employer" means any person for whom an individual performs or performed any service, of whatever nature, under an employer-employee relationship. It also refers to the person having control of the payment of the compensation in cases where the services are or were performed for a person who does not exercise such control. ( Sec. 2.78.4, Revenue Regulations No. 2-98 ) On the other hand, the term "employee" is an individual performing services under an employer-employee relationship. It covers all employees, including officers and employees, whether elected or appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or instrumentality. ( supra ) In general, the relationship of the employer and employee exists (1) when there is a payment of compensation; (2) when the person for whom services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which the result is accomplished; and (3) the right to dismiss an employee is also an important factor indicating that the person possessing that right is an employer. ITCcAD From the foregoing provisions, it is clear that the priests can not be considered employees of the RCAM in the absence of the requirements of control over the payment of compensation and the right to dismiss them (priests). The fact that RCAM actually directs or controls the manner in which the services are to be performed will not alter the fact that the priests are not employees of the RCAM. ( BIR Ruling No. 287-87 dated September 15, 1987 ). WHEREFORE, in view of the foregoing, this Office holds that your request for the qualification of the Roman Catholic Archbishop of Manila Priests' Retirement Plan is hereby DENIED for lack of legal basis. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service