Exemption from Final Withholding Tax of Interest Income Derived by Retirement Plan from Its Depository Bank

September 15, 2000 BIR RULING NO. 042-00 Private Education Retirement Annuity Association P.O. Box 1785 MCPO Makati City Attention: Mr . Oscar G . Josef President Gentlemen : This refers to your letter dated July 21, 1999 requesting for a ruling as to whether or not the interest income received by the Private Education Retirement Annuity Association (PERAA) Retirement Plan from its depository bank under the expanded foreign currency deposit system is subject to the 7.5% final income tax pursuant to Section 24(B)(1) of the Tax Code of 1997, as implemented by Revenue Regulations No. 10-98. It appears that in BIR Ruling No. ERP-249-99 dated August 9, 1999, this Office ruled "In reply, please be informed that PERAA Plan Agreement, an employees' trust and retirement fund, remains entitled to all the benefits and privileges granted under Section 60(B) of the Tax Code of 1997 and is still considered reasonable retirement benefit plan within the contemplation of Section 32(B)(7)(a) of the Tax Code of 1997. Consequently, the funds created to implement the provisions of the plans and the retirement pay to its respective retirees remain exempt pursuant to said law." IEAacT In reply thereto, please be informed that Section 24(B)(1) of the Tax Code of 1997 provides that interest income received by an individual taxpayer (except a non-resident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7.5%) of such interest income. . . On the other hand, Section 60(B) of the said Code provides that "Sec. 60. Imposition of Tax . "xxx xxx xxx "(B) the tax imposed by Title II of the said Code 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 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: . ." There can be no uncertainty that Section 60(B) of the Tax Code of 1997 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 that 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 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;". . . (emphasis ours). 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 Rep. Act 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 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, 27 May 1968, 23 SCRA 715); emphasis 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. "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, 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" Based on the foregoing, it is therefore safe to conclude that the interest income derived by PERAA Retirement Plan from its depository bank under the expanded foreign currency deposit system is exempt from the 7.5% final withholding tax imposed under Section 24(B)(1) of the Tax Code of 1997, as implemented by Revenue Regulations No. 10-98. 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. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue