BIR Ruling [DA-356-99]

June 18, 1999 BIR RULING [DA-356-99] PSBA Faculty Association, Inc. 826 R. Papa Street Sampaloc, Manila Attention: Ms . Bennypaul P . Gacula Gentlemen : This refers to your letter dated March 4, 1999 stating the following: 1) That sometime in 1970, the PSBA Faculty and Employees Retirement Plan was established which was subsequently approved by the BIR in May 1976 and was motivated by a tax exemption feature granted upon its approval; 2) That the institution (PSBA Manila) was allowed to claim the amount remitted to the provident fund as necessary expense and therefore categorized as legitimate business expense; 3) That it is submitted that the existing Retirement Fund contribution is anomalous, because the faculty shares 8% of their monthly salary while the school contributes only 4.5%; 4) That the school fulfills its obligation in paying the retirement benefits from the share of the faculty in the 70% tuition fee increment; 5) That it is the considered opinion of the members that it is better to dissolve the existing Retirement Fund and in lieu thereof, entitle them to a retirement benefit equivalent to month salary for every year of service under R.A. No. 7641; and 6) That all the contributions after dissolution will accrue to the benefits of the members without affecting their seniority rights and tenure. In connection therewith, you now request for a ruling as to whether or not the distribution by the Retirement Fund to its member-employees of the amounts representing the contributions made by the employer and member-employees as a result of the dissolution of the said Fund does not constitute income to the recipient employees and therefore not subject to income tax nor withholding tax. In reply thereto, please be informed that 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. In the instant case, the amounts which represent a return of the personal contributions of the employee-members to the Fund, who are still in the active service of PSBA Manila, 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 of the employee-members who are still in active service shall be 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 PSBA Manila. 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 PSBA Manila. 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. LLpr 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)