Tax Consequence of Employees' Withdrawal of Contributions from Retirement Fund

October 30, 2000 BIR RULING NO. 051-00 Far East Bank and Trust Company Far East Bank Center Senator Gil J. Puyat Avenue Makati City Attention: Atty. Mildred Maranan-Garcia Gentlemen : This refers to your letter dated November 24, 1998 requesting for a ruling on the tax consequence of the withdrawal of contributions by some of its employees representing their contributions to the said Fund. It is represented that the Divine Word Educational Association Retirement Plan was established to provide retirement benefits for qualified employees of schools, colleges, universities and Society of Divine Word (SDV) Education Secretaries office owned and/or operated by members of the SVD and other institutions, congregations or orders which are subsequently accepted by the Retirement Board; that the Fund was basically non-contributory; that, however, its members, may, prior to their retirement elect to contribute an amount equal to at least 2% of their current monthly salary; that the contributions shall be subject to the provisions of the Plan and shall not be subject to withdrawal unless for causes provided therein; that due to the prevailing economic crisis, a number of members who have exercised their option to contribute to the Fund found themselves financially incapable of continuing their contributions and that they in fact requested the withdrawal of the said contributions. In reply, please be informed that Section 36 of the Income Tax Regulations provides that income in the broad sense, means all wealth which flows into the taxpayer other than a mere return of capital. Such being the case, any and all amounts which represent a return of the personal contributions of the employees to the Fund, who are still in the active service of SVD, shall not be subject to income tax, since the same are considered as mere return of capital. DCATHS However, the income or earnings derived from the personal contributions by the employee-members' are subject to income tax since in a retirement plan under R.A. No. 4917 [now Section 32(B)(6)(a) of the Tax Code of 1997], the employer, or officials and employees or both, contribute to a trust fund for the purpose of distributing to such officials and employees or their beneficiaries, the corpus and income accumulated by the trust in accordance with the plan. Section 2(d) of Revenue Regulations No. 1-68, as amended, provides for exemption from income tax only the benefits received by officials or employees upon retirement, in accordance with the BIR-approved Retirement Plan rules or written program. In other words, in order to be exempt from the payment of income tax, the benefits must be paid or distributed to the officials or employees upon their retirement from the service and not while they are still in the employ of the company-employer. In the instant case, the earnings/income of the personal contributions of the employees constitute benefits (not retirement benefits envisaged by the trust fund trustee to the employee) not upon their retirement but while they are still in the service of the school colleges, universities and Society of Divine Word (SVD) Education Secretaries office owned and operated by SVD. Consequently, pursuant to Section 60(B) of the Tax Code of 1997, any and all amounts actually distributed to said member-employees over and above their personal contributions shall be taxable to them in the year in which so paid or distributed, considering that such distribution has been effected before their retirement from SVD. This means that, only upon retirement , the total benefits which the employees shall receive consisting of their personal contributions, counterpart contribution of the employer and the income of the Fund to which the employees are entitled and are distributed to them shall be exempt from income tax. 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