Banco de Oro Unibank, Inc. Trust & Investments Group

September 18, 2009 BIR RULING [DA-(TSF-007) 560-09] 127 (A); 60 (B); DA-053-2007 dtd. 1/31/07 Banco de Oro Unibank, Inc. Trust & Investments Group #12 ADB Avenue, Ortigas Center Mandaluyong City Attention: Atty. Cristina Barbara V. Concepcion Senior Asst. Vice President Gentlemen : This refers to your letter dated March 24, 2009 requesting for a ruling on whether or not the income earned by the retirement plans duly qualified by the Bureau of Internal Revenue (BIR) as a "reasonable private benefit plans" from their investment in shares of stocks listed and traded through the Philippine Stock Exchange (PSE) is exempt from the stock transaction tax under section 127 (A) of the Tax Code of 1997 pursuant to Section 60 (B) of the same Code. It is represented that Banco de Oro Unibank, Inc. is a universal bank organized and existing under Philippines laws; that the Bank, through its Trust and Investments Group, is duly authorized to perform trust and other fiduciary businesses by the Bangko Sentral ng Pilipinas; that given such authority, it is the trustee of various retirement plans, and manages funds of various trusted retirement plans, duly qualified by the BIR as "reasonable private benefit plans" within the contemplation of RA 4917 ("Qualified Retirement Plans"); that these Qualified Retirement Plans have investments in various investment outlets including in shares of stock listed and traded in the PSE. In reply thereto, please be informed that Section 60 (B) of the Tax of 1997 as amended, 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 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. ECTIHa 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 (RA) 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 attachments, 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 RA 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 RA 1983, reading: "Considering that under Section 17 of the Social Security Act, all contributions collected and payments of sickness, unemployment, retirement, disability an 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. DAHSaT "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 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 which it is not supposed to pay in the first place. "xxx xxx xxx It is to be emphasized, that in both the capital gains tax and the stock transaction tax, the nature of the object of 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 Banco de Oro Unibank's various Retirement Plans may properly be classified as capital assets. Although the stock transaction tax falls under Title V of the Tax Code of 1997, as amended, the said tax is essentially a tax on income. IN VIEW OF THE FOREGOING, since the stock transaction tax is essentially a tax on income earned by Banco de Oro Unibank's various Retirement Plans from investments in shares of listed and traded through the Philippine Stock Exchange (PSE), is exempt from the stock transaction tax under Section 127 (A) of the Tax Code of 1997, as amended, pursuant 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. aATHIE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service