Income from Deposit Administration Fund Investments Subject to Income Tax

June 24, 1985 BIR RULING NO. 095-85 29 (c) (7) (A) 006-83 095-85 Gentlemen : This refers to your letters dated January 31 and March 23, 1984 requesting reconsideration of our ruling issued on February 2, 1979 which modified our ruling of May 4, 1977 to the effect that as one of the fully insured plans with that company, Boehringer Ingelheim (Phil.), Inc. Retirement Benefit Plan is non-trusteed; that as such, only the retirement benefits to be received by the employee-members of the Plan shall be exempt from income tax pursuant to Republic Act No. 4917 (now Sec. 29(c)(7)(A) of the Tax Code); that the Plan cannot under the clear provisions of Section 56(b) of the Tax Code claim tax exemption on income derived from investments of its retirement fund; that the employer-corporation cannot claim deduction for the past service liability contributions; and that the deductible contributions of the employer-corporation shall consist only of the premiums actually withdrawn from the Deposit Administration fund. cdta You contended that under our laws, an insurance company like the Philippine American Life Insurance Company (Philamlife) is qualified to act as trustee of the insured Boehringer Ingelheim (Phils.) Inc. Retirement Benefit Plan (Boehringer Retirement Plan for short) or any other insured plan for that matter which uses a Deposit Administration Contract (DAC) or Group Deferred Annuity Contract (GDAC) as its funding instrument; that trusteeship is an accessory of or incident to a DAC or GDAC; hence, that aside from the tax exemption of the employee-members' retirement benefits, income derived from investments of the retirement fund shall not be subject to any tax whatsoever, and that the employer's contribution to the fund is a deductible expense. In reply, I have the honor to inform you as follows: 1. Income from deposit administration fund investment is subject to income tax . Exemption from taxation is never presumed nor implied. The grant of tax exemption must be express, clear and unambiguous. In other words, a claim of exemption from tax payment must be clearly shown. It should be based on the language in the law too plain to be mistaken. ( Govt. of the Philippine Islands vs. Monte de Piedad, 52 Phil. 352; New York v. Tax Commissioners, 199 U.S.I., 25 Sup. Ct. 705, 50 L ed. 65, 4 Ann. Cas. 381) Thus, exemption from taxation of the retirement benefits paid to private employees under a reasonable retirement benefit plan maintained for their exclusive benefit by their employer is expressly provided for by Section 29(c)(7)(A) of the Tax Code as amended. Likewise, Section 56(b) of the same Code is explicit that earnings or income from employees' retirement fund investments are exempt from income tax only when they accrue to a trust fund plan ; hence, indubitably excluding from the ambit of the tax exemption so-called non-trusteed plans. Contrary then, to your counsel's contention, the said tax exemption does not encompass a trusteeship which is merely an accessory of, or incident to a group permanent insurance contract, such as the DAC or GDAC. While no particular words are required for the creation of an express trust, a trust must clearly be intended. (Art. 1444, New Civil Code) Trust cannot be implied in a contract of insurance, in the same way that authority to perform trust functions cannot be implied from an authority to issue insurance contracts. The trust must be evidenced by an executed written document setting forth the terms thereof, and executed by and between the employer as trustor and the trustee or trustees of the employees' retirement trust fund, duly signed by the parties to the trust and acceptance by the trustees indicated therein. (See Rev. Rul. 56-673, C.B. 1956-2, 281 & Rev. Rul. 69-231 I.R.B., 11 p. 30,044, par. 2605.70, CCH Vol. 3 (1970)) As distinguished from a trust fund plan, a trust agreement is not employed in insured group pension plans. (p. 134, Pension Planning by Allen, Melone and Rosenbloom, 3rd ed.) Thus, as in the case of any fully insured group plan, the Boehringer Retirement Plan has no trustee. It is to be noted that neither the DAC or GDAC of the fully insured Boehringer Retirement Plan has complied with the foregoing requirements. Accordingly, an insured plan, like the Boehringer Retirement Plan which is established and maintained by the employer, Boehringer Ingelheim (Phil.), Inc. (Boehringer (Phil.) for short) under a DAC/GDAC executed by and between the employer as the insured or policyholder and Philamlife, an insurance company as the insurer is a non-trusteed plan. cdti Moreover, under Central Bank (CB) Circular Nos. 824 and 825, the DAC of the insured Boehringer Retirement Plan cannot be considered an agreement constituting a trust relationship because the insurer, Philamlife under the DAC assumes the risk or responsibility in case of loss in the investment; it guarantees a face amount or income; and the DAC contains a stipulated fixed rate of interest or return to be credited to funds held by the insurer. This is not so, however, in the case of trust fund plan because unlike the insurer, the trustee under the trust indenture does not make such guarantees and stipulations as it is required to account for all the income earned and turn over the same to the client-beneficiaries net only of his fees and necessary expenses. By and large, considering that the Boehringer Retirement Plan is non-trusteed, it cannot under the clear provisions of Section 56(b) of the Tax Code claim exemption from income tax on the earnings or income from all kinds of investments of the deposit administration fund. Pursuant to Section 21 (d) in relation to Section 53(d)(1) both of the Tax Code, as amended by P.D. No. 1959 which took effect on October 15, 1984, non-trusteed deposit administration or insured retirement plan funds like the Boehringer Deposit Administration Fund, which has always been subject to income tax on income from investments, shall now be subject to the 15% final withholding tax on interest and/or yield on deposit substitute instruments and interest on its savings and time deposits paid or accrued beginning October 15, 1984 . 2. Deductible contributions of the employer shall consist only of the premiums actually withdrawn from the deposit administration fund . Premiums collected in connection with insured pension plans become a part of the insurer's general assets. The distinguishing characteristic of deposit administration contracts is the fact that employer contributions are not allocated to specific employees until retirement date. Stated differently, the actual purchase of annuities does not take place until an employee retires . (pp. 159, 219 & 223, Pension Planning supra) Consequently, the employer, Boehringer (Phil.) may deduct the retirement benefit payments (but not the annuity premiums) to the extent that they are reasonable. Deduction would be permissible only in the year the retirement benefits are paid regardless of when accrued . (par. 2643.02, p. 30, 251, Vol. 3 CCH (1970)) 3. Boehringer (Phil.) is not entitled to a deduction for past service liability contributions . Under Section 30(j) of the Tax Code, an employer's past service contributions are deductible only when such contributions are made or accrue to a trust. Section 30(j) explicitly refers to "pension trust" thus excluding from its application, retirement funds which are not trusteed. Accordingly, since the Boehringer Retirement Plan is a non-trusteed plan, the employer Boehringer cannot claim deduction for past service liability contributions. cdtech In view thereof, this Office finds no cogent reasons to modify or reconsider our ruling dated February 2, 1979. Paragraphs (2) and (3) above clarify the penultimate paragraph of our ruling issued on March 12, 1970 relative to the tax treatment of the B.F. Goodrich Philippines, Inc. Retirement Plan which is also insured with Philamlife under a Deposit Administration Contract. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner