BIR Ruling [DA-652-04]

December 21, 2004 BIR RULING [DA-652-04] 60 (B) SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr. Joel L. Tan-Torres Partner, Tax Division Gentlemen : This refers to your letter dated October 8, 2004, requesting on behalf of your client, Alaska Milk Corporation Retirement Plan (AMCRP) for a confirmation of your opinion that the rental income they will receive from leasing out of their real properties previously acquired as investments are not subject to income tax and consequently to withholding tax. It is represented that AMCRP is a retirement fund created pursuant to a Retirement Plan that provides for a lump sum retirement, death and disability benefit program for all the regular salaried employees of Alaska Milk Corporation, in accordance with the provisions of Republic Act No. 4917; that a letter of exemption stating that AMCRP is a "reasonable private benefit plan" within the contemplation of Section 32(B)(6)(a) of the 1997 Tax Code was issued by the Bureau of Internal Revenue (BIR) on December 2, 1998; that said letter of exemption further confirmed the following: (1) the retirement benefits to be received by the employee-members of AMCRP are exempt from all taxes, (2) the exemption from income tax of the income of AMCRP from its investments, and (3) the deductibility from gross income of the contributions of the Alaska Milk Corporation to AMCRP; that such letter of exemption provided that the qualification of AMCRP as a "reasonable private benefit plan" shall continue through all the years that it shall be in operation; that among the investments of AMCRP are two (2) parcels of land located at Barrio San Antonio, San Pedro, Laguna and covered by Transfer Certificates of Title Nos. T-356881 and T-356882; that AMCRP intends to lease out said parcels of land; and that earnings from the lease of said properties shall neither be used for nor be diverted to any purpose other than for the exclusive benefit of the member-employees of AMCRP. In reply, please be informed that Section 32(B)(6)(a) of the Tax Code of 1997 provide as follows: "Sec. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (6) Retirement Benefits, Pensions, Gratuities, etc. (a) 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: Provided , That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further , That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term ' reasonable private benefit plan ' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees." The foregoing provision should be taken in relation to Section 60(B) of the same Tax Code, which specifically exempts employees' trusts from income tax as follows: "Sec. 60. Imposition of Tax . xxx xxx xxx "(B) Exception . The tax imposed by this Title shall not apply to employee's 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 or 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: Provided , That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. (emphasis supplied) the Supreme Court in the case of CIR v. CA , CTA, GCL Retirement Plan (207 SCRA 487, G.R. No. 95022, March 23, 1992), had affirmed the exemption of retirement plans from income tax, as follows: "The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision [Section 60 (B) of the Tax Code]. It is unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts for tax exemption. "And rightly so, by virtue of the raison d' etre behind the creation of employees' trusts. Employees' trusts or benefit plans normally provide economic assistance to employees upon the 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 Rep. Act No. 1983, Section 56(b), [now Section 60(B) of the 1997 Tax Code] 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 v. Visayan Electric Co., et al. , G.R. No. L-22611, 27 May 1968, 23 SCRA 715) (italics supplied) "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 intendment of the law." (emphasis supplied) In view of the foregoing, income earned by a "reasonable private benefit plan" from its investments shall be exempt from income tax and withholding tax. ESacHC Inasmuch that the BIR issued a letter of exemption finding AMCRP to have conformed with all the requirements prescribed for by Section 32(B)(6)(a) of the Tax Code of 1997 for a "reasonable retirement benefit plan", and considering further that AMCRP has in a way invested the funds of the Retirement Plan in parcels of land, then any income to be earned by AMCRP from the lease of the above-mentioned properties shall be exempt from income tax and consequently to withholding tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service