Quiason Makalintal Barot Torres & Ibarra

March 9, 2009 BIR RULING [DA-(C-035) 141-09] 60 (B); DA-054-2007; DA-324-2005; DA-474-2005 Quiason Makalintal Barot Torres & Ibarra 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue corner Pedro Poveda Street 1605 Ortigas Center, Pasig City Attention: Attys. Ruelito Q. Soriano and Benedict R. Tugonon Gentlemen : This refers to your letter dated February 23, 2009 requesting on behalf of your client, Manila Electric Company ("Meralco") for a ruling confirming that the income earned by the Manila Electric Company Pension Fund from the sale of its investments in shares of stock listed and traded in the Philippine Stock Exchange is exempt from income tax, capital gains tax and the stock transaction tax imposed under Section 127 (A) of the Tax Code of 1997, pursuant to Section 60 (B) of the same Code. DIEAHc Background Meralco established and created a fund known as the Manila Electric Company Pension Fund ("MPF") by virtue of a Trust Agreement dated March 14, 1968. MPF is a non-contributory, defined benefit plan established to provide retirement benefits to eligible employees as provided for in Meralco's retirement plan. MPF is registered with the Bureau of Internal Revenue ("BIR") under Republic Act No. 4917. As such, MPF is exempt from income tax. In a ruling issued by the BIR on March 7, 1969, the BIR declared that the Retirement Plan created pursuant to the Trust Agreement meets substantially the requirements prescribed by law and regulations for a qualified plan and MPF qualifies as a reasonable benefit plan within the contemplation of R.A. No. 4917 and is entitled to all the benefits provided for in the said Act. On June 18, 1969, the BIR further ruled that the Pension Fund is exempt from income tax under then Section 56 (b) of the Tax Code, as amended, now Section 60 (B) of the Tax Code of 1997. MPF has several investments including investments in shares of stock listed and traded in the Philippine Stock Exchange ( i.e., Manila Electric Company, Benpres Holdings Corporation, Philippine Long Distance Telephone Company, Ayala Corporation, Ayala Land, Inc., Metro Bank, SM Investment Corporation, SM Prime Holdings, Inc., Bank of the Philippine Islands and others). In view thereof, you now request for confirmation of your opinion that any income that MPF will derive from the sale of any of its shares of stock listed and traded in the Philippine Stock Exchange (including without limitation, any sale of shares of stock in Manila Electric Company) is exempt from income tax and the stock transaction tax imposed under Section 127 (A) of the Tax Code of 1997, pursuant to Section 60 (B) of the same Code. In reply, please be informed that Section 60 (B) of the Tax Code of 1997, as amended, expressly exempts employees' trust from income tax, to wit: 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 . . . (Emphasis ours) SDTcAH Interpreting the afore-quoted provision of the Tax Code, in the case of Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 95022, the Supreme Court upheld the judgment of the Court of Appeals and the decision of the Court of Tax Appeals, sustaining the income tax and withholding tax exemption of a qualified plan, to wit: ". . . 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). IHEDAT "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. xxx xxx xxx" Furthermore, in BIR Ruling No. DA-054-2007 dated January 31, 2007, this Office confirmed the exemption from the stock transaction tax of the sale of shares listed and traded through the Philippine Stock Exchange by ING Bank N.V. Manila Branch-Trust Department, a qualified employees' retirement fund, to wit: "It is to be emphasized, that both the capital gains tax and the stock transaction tax, the nature of the object of the aforesaid taxes is the same i.e. , income from the sale, exchange or other disposition of a capital asset. Thus, in the case of China Banking Corporation vs. Court of Appeals, 336 SCRA 178 (2000), the Supreme Court held that "an equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gains or capital loss." As such, the shares of stock owned by ING Bank N.V. Manila Branch-Trust Department (ING Trust) Retirement Plan may properly be classified as capital assets. Although the stock transaction tax falls under Title V of the Tax Code, the said tax is essentially a tax on income. WHEREFORE, in view of the foregoing, since the stock transaction tax is essentially a tax on income, income earned by the ING Bank N.V. Manila Branch-Trust Department (ING Trust) Retirement Plan from investments in shares of stock listed and traded through the Philippine Stock Exchange is exempt from the stock transaction tax under Section 127 (A) of the Tax Code of 1997 pursuant to Section 60 (B), supra. " cEaCAH Accordingly, this Office hereby confirms your opinion the sale by MPF of shares of stocks listed and traded in the Philippine stock exchange, MPF is exempt from the stock transaction tax under Section 127 (A) of the Tax Code, since the stock transaction tax is essentially a tax on the income of MPF and is a substitute tax to the capital gains tax. In the event MPF sells shares of stocks not traded through the Philippine Stock Exchange, it is also exempt from capital gains tax for the reason that capital gains tax is an income tax imposed under Title II of the Tax Code. Both the capital gains tax and the stock transaction tax are taxes imposed on the income from the sale, exchange or other disposition of a capital asset. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service