BIR Ruling [DA-637-99]

November 11, 1999 BIR RULING [DA-637-99] Atty. Benjamin R. Abenojar, Jr. 2nd Floor, AM Building 28 Quezon Avenue Quezon City S i r : This refers to your letter dated February 15, 1999 requesting for reconsideration of BIR Ruling No. DA-078-99 dated February 8, 1999 addressed to Mitsubishi Motors Philippines, where this Office ruled as follows: cdll "xxx xxx xxx "In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, any amount received by an official or employee or by his heirs from the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee is exempt from income tax regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the said official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. "The above-mentioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of your retrenched employees is beyond their control, any and all amounts (including their personal contribution to the Fund and the counterpart contribution of the employer), received by them as a result thereof, are exempt from all taxes and consequently, from withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997. "It is however, understood that this exemption does not include payments of their salaries. (BIR Ruling No. 014-93 dated January 15, 1993) "On the other hand, 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. Such being the case, any and all amounts which represent a return of the personal contributions of the employees to the Fund, who are still in the active service of Mitsubishi Motors Philippines Corporation, shall not be subject to income tax, sine the same are considered as mere return of capital. "However, the income or earnings derived from the personal contributions by the employee-members who will not be retrenched are 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 their beneficiaries, the corpus and income accumulated by the trust in accordance with 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 contribution 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 Mitsubishi Motors Philippines. 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 the retirement from Mitsubishi Motors Philippines. 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. cdll xxx xxx xxx In your letter dated February 15, 1999, you stated that in the above-cited ruling, the BIR allowed full exemption to those member-employees who were separated from the service and allowed only exemption on the counterpart contribution of the members to those who are still connected with the company; that under the circumstances wherein the fund is being distributed, you believed that all the fund members should be treated equally having contributed to the fund under the same rules and conditions; that the fund until its dissolution has not lost its tax-exempt status as the intended purpose of the plan, which is for the exclusive benefit of the fund members, was well preserved until its abolition; that, while it is true that R.A. 4917 contemplates retirement or separation from the service at the time of receiving the benefit, this must be viewed as a statement of the general rule because it admits exemption under the following circumstances: 1) Reasonable pre-termination of the plan as provided for in Sec. 2(b) of Revenue Regulations No. 1-68. The regulations provides that one of the essential requisites of a reasonable plan is permanency, that is, it must be a permanent and continuing program unless sooner terminated by virtue of a valid business reason. As has been pointed out in the initial request, the dissolution of the plan is due to unabated business reversals resulting unto huge losses to the company, therefore, it falls squarely under the exception clause; 2) Sec. 32(B)(6)(a) of the Tax Code also provides that benefits granted under the law shall be availed of by an official or employee only once. So, when the fund members receive their shares from the fund now, they will be barred from receiving the same retirement plan subsequently from the same or any other employment, as if the plan has been received at the end of their employment. If you don't allow the tax exemption benefit now and they are subsequently retrenched, or separated they will not enjoy the tax exemption benefit of the plan that was enjoyed by those earlier separated. 3) Severance beyond the control of the employees. The life of the fund is not perpetual nor coterminous with that of the employer because the enabling law allows its pre-termination. Therefore, when it is abolished, the relationship of the employer and employees is severed or terminated with respect to the fund, a severance that is beyond the control of not only the employees but also of the employer. By analogy, you believed this situation falls under the final proviso of R.A. 4917 considering that the intention of the law is to provide protection to the employees; and LibLex 4) Finally, Sec. 24(B)(1) of the Tax Code of 1997 provides that interest income from the long-term deposits or investments in the form of savings, common or individual trust funds are exempt from tax. Considering that the plan has been in existence for more than twenty-five (25) years now, you believe that the interest income earned by the counterpart contribution of the employees themselves should be exempt from withholding tax it being tax exempt. In reply, please be informed that after a careful re-study of the above-cited ruling together with the laws applicable thereto, this Office regrets to inform you that your request for reconsideration cannot be granted for lack of legal basis. Such being the case, the position held by this Office in BIR Ruling No. DA-078-99 dated February 8, 1999, particularly the opinion that the income derived from the personal contributions by the employee-members' who will not be retrenched are subject to income tax, is still maintained. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)