Diaz Murillo Dalupan and Co.

April 2, 2009 BIR RULING [DA-(C-050) 183-09] 32 (B) (6) (a); 60 (B); DA-342-06; DA-557-2006 Diaz Murillo Dalupan and Co. 5/F Don Jacinto Bldg. Dela Rosa cor. Salcedo Sts. Legaspi Village, Makati City Attention: Atty. Bethuel V. Tanupan Partner Gentlemen : This refers to your letter dated January 21, 2009, on behalf of Sterling Products International, Inc. (Philippine Branch) Retirement Plan, (SPII-RP), for an opinion that its sale of a real property is exempt from the payment of capital gains tax and the creditable withholding tax (CWT). The facts as represented are as follows: SPII-RP, the trustee of which is the Bank of the Philippine Islands (BPI) is a BIR registered private benefit plan within the contemplation of Section 32 (B) (6) (a) of the 1997 Tax Code. SPII-RP's funds have been invested in both securities and real estate. One of the assets owned by SPII-RP is a real property at Epifanio delos Santos Avenue, Brgy. Ilaya, Mandaluyong City covered by Transfer Certificate of Title (TCT) No. 450206 with an area of 11,247 square meters, more or less. SPII-RP, as the registered owner thereof will sell the same and the proceeds of which will be used for the payment of its obligations under the Retirement Plan. CaEATI 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) . . . . 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." caSDCA 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. This Office has confirmed such position in BIR Ruling No. DA-342-06 dated June 1, 2006, to wit: "In reply thereto, please be informed that one of the benefits and/or privileges that a qualified employees' retirement plan is entitled, within the purview of Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, is the exemption from income tax of the income of the trust fund from its investment. (Section 60(B)] of the Tax Code of 1997) In relation thereto, Section 60(B) of the Tax Code of 1997 provides that the tax imposed by Title II 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 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: Provided, That any amount actually distributed to an 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 of distribute. Such being the case, and since Borden Chemical Philippines, Inc., is a qualified employees retirement plan with the purview of Section 32(B)(6)(a) of the Tax Code of 1997, as amended, the capital gains, if any, which will be realized by it from the sale of a parcel of land covered by TCT No. T-32910 shall be exempt from the payment of capital gains tax imposed under Section 24(D) of the Tax Code of 1997 (n)or to the creditable withholding tax prescribed under Revenue Regulations (RR) 2-98, as last amended by RR 30-2003. (BIR Ruling Nos. 368-88 dated August 3, 1988 and 010-90 dated January 31, 1990) HTCIcE Moreover, 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: aIcSED 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 the withholding tax. In as much as this Office had already issued an opinion stating that SPII-RP to have conformed with all the requirements prescribed for by Section 32 (B) (6) (a) of the Tax Code of 1997 as a "reasonable retirement benefit plan", and considering further that it has invested the funds of the Retirement Plan in the acquisition of the subject parcel of land, then any income to be earned by SPII-RP from the sale of the aforesaid property shall be exempt from income tax and/or to the CWT. 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. AHcDEI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service