Noritake Porcelana Mfg., Inc.

April 1, 2009 BIR RULING [DA-(C-048) 180-09] 60 (B); DA-054-07 Noritake Porcelana Mfg., Inc. Concepcion, Marikina City Attention: Mr. Tatsuya Koide Director Gentlemen : This refers to your letter dated January 14, 2009 requesting that NORITAKE PORCELANA EMPLOYEES RETIREMENT PLAN (NPERP, for short) is a qualified employees' retirement plan and is duly-registered as such with the BIR; that NPERP has investments in shares of stock not listed and traded in the Philippine Stock Exchange. In connection therewith, you now request confirmation of your opinion that income earned by NPERP from its investments in shares of stock is exempt from the capital gains tax under Section 27 (D) (2) of the Tax Code of 1997 pursuant to Section 60 (B) of the same Code. In reply thereto, please be informed that Section 60 (B) of the Tax Code of 1997 provides that: cEITCA "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 exempted 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. 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;" HIAcCD "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. HCITcA "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" It is to be emphasized that capital gains tax is a tax on the 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 NPERP may properly be classified as capital assets. WHEREFORE, in view of the foregoing, since capital gains tax is essentially a tax on income, income earned by the NPERP from investments in shares of stock is exempt from the capital gains tax under Section 27 (D) (2) of the Tax Code of 1997 pursuant to Section 60 (B), supra. 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. CAIHTE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service