BIR Ruling [DA-643-06]

October 27, 2006 BIR RULING [DA-643-06] 32 (B) (6) (a), 60 (B); DA-009-2006 Borden Chemical Philippines, Inc . 6th Floor, Padilla Building, Emerald Avenue Ortigas Center, Pasig City Attention: Atty. Vicente G. Gregorio Counsel Gentlemen : This refers to your letter dated October 19, 2006 stating that Borden Chemical Philippines, Inc . (formerly Borden International Philippines, Inc.) established a Retirement Plan for its employees which qualified under Republic Act No. 4917, within the contemplation of Section 29(a)(7)(A) of the NIRC [now Section 32(B)(6)(a)] and was approved by the BIR as a tax-exempt retirement fund on August 17, 1983; that the funding of the Plan and payment of the benefits was provided for through the medium of a Retirement Fund held by a Trustee under an appropriate Trust Agreement; that in a Trust Agreement dated December 16, 1981, Prudential Bank (now BPI) was appointed as trustee of the said Retirement Plan, to receive, hold, invest, administer and distribute the funds to the retiring employees; that in the same Trust Agreement, the Trustee, Prudential Bank was directed and authorized to hold and to invest and reinvest the Fund of the Retirement Plan; and that under the Retirement Plan, after meeting and/or paying all liabilities and claims of the employees, any amount in excess or as may remain in the Retirement Fund and other assets shall revert to the company. Based on the foregoing representations, you now request for a ruling on behalf of Borden Chemical Philippines, Inc., that any amount in excess or as may remain in the Retirement Fund from its income from BPI, after the payment of all liabilities and claim against the Retirement Fund is not subject to any final withholding tax on its income. However, at the time when the said excess will be reverted to Borden Chemical Philippines, Inc., such excess shall be subject to income tax. In reply thereto, please be informed that Section 60(B) of the Tax Code of 1997 provides that "Sec. 60(B) Exception. The tax imposed by Title II shall not apply to 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 (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees. . ." Section 60(B), supra , specifically exempts employees' trust from income tax. Since the final tax and the withholding thereof are embraced within the title on "Income Tax", it follows that said trust must be deemed exempt therefrom. Otherwise, the exception becomes meaningless. cHCaIE Similarly situated is the case of Commissioner of Internal Revenue vs. Court of Appeals , G.R. No. 95022 promulgated on March 23, 1992 , where the Court upheld the judgment of the respondent Court of Appeals in affirming the decision of the Court of Tax Appeals, which ruled ". . . it is significant to note that the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Republic Act (R.A.) No. 4917 approved on June 17, 1967. This law specifically provided: "Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits 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 exempt from all taxes and shall not be liable to attachment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action;" xxx xxx xxx "And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans normally provide economic assistance to employees upon occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose. "The tax advantage in R.A. No. 1983, Section 56(b), was conceived in order to encourage the formation and establishment of such private plans for the benefit of laborers and employees outside of the Social Security Act. Enlightening is a portion of the explanatory note to H.B. No. 6503, now R.A. 1983, reading: "Considering that under Section 17 of the Social Security Act, all contributions collected and payments of sickness, unemployment, retirement, disability and death benefits made thereunder together with the income of the pension trust are exempt from any tax, assessment, fee, or charge, it is proposed that a similar system providing for retirement, etc. benefits for employees outside the Social Security Act be exempted from income taxes." ( Congressional Record, House of Representatives, Vol. IV, Part 2, No. 57, p. 1859, May 3, 1957; cited in Commissioner of Internal Revenue vs. Visayan Electric Co., et al., G.R. No. L-22611, May 27, 1968, 23 SCRA 715 ). "It is evident that tax exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution of accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intent of the law. "xxx xxx xxx "There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56(b), now Sec. 53(b), Tax Code). The application of the withholding system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place. HDIaST "xxx xxx xxx" Such being the case, any income derived by Borden Chemical Philippines, Inc. Retirement Plan, from its currency bank deposit, deposit substitutes, and investments in money market placements, is exempt from the 20% final withholding tax pursuant to Section 60(B) of the Tax Code of 1997, as amended. Accordingly, any excess in the interest income of the fund, after payment of all liabilities and claims against the Retirement Fund, which will revert to Borden Chemical Philippines, Inc., shall be declared as income by Borden Chemical Philippines, Inc. which shall pay the corresponding income tax thereon as prescribed in Section 27(A) of the Tax Code of 1997, as amended, at the time when such excess was actually realized. However, BPI as trustee, is not obligated to withhold any final withholding tax on the reversion of such excess to Borden Chemical Philippines, Inc. ( BIR Ruling Nos. DA-286-2006 dated April 28, 2006 and DA-349-2006 dated June 6, 2006 ) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service