Implications on the Tax-Exempt Status of the PAL Pilot's Retirement and Benefit Plan

May 5, 1988 BIR RULING NO. 197-88 28 (b) (7) (A) 000-00 197-88 Gentlemen : This refers to your letters dated November 26, 1986 and March 4, 1987 requesting in behalf of your client, the Airline Pilots Association of the Philippines, a ruling on the implications on the tax-exempt status of the PAL Pilot's Retirement and Benefit Plan if the interest rate on loans extended to its members were to be reduced from six percent to three percent. It is represented that a reduction in the rate of interest would not affect the tax-exempt status of the abovementioned Plan because Sec. 5(a) of Revenue Regulations No. 1-68 dies not apply to loans extended to members of a retirement benefit plan, since such a loan is not an investment; that a three percent rate of interest is reasonable; that Sec. 53(b) of the Tax Code imposes only one limitation, on the uses to which an employee's trust may be devoted, i.e. it is impossible for any part of the corpus or income of the trust fund to be used for, or diverted to, purposes other than for the exclusive benefit of the employees; and that loans extended to members of the aforesaid Plan at three percent rate of interest, would be for the exclusive benefit of the employees. In reply, please be informed that provision may be made for granting loans to participants provided the loans are granted in a uniform and non-discriminatory manner. The qualification of a plan will not be affected by a provision in the trust instrument that adequately secured loans bearing a reasonable rate of interest and providing for repayment within a specific period of time may be in amounts exceeding their vested interest (See Rev. Rule 67-288, C.B. 1967-2, 151 cited in p. 30, 104, par. 2611, 44, Col. 3 CCH, 1970) The reasonable rate of interest is the current interest rate fixed by the Board of Trustees for loans which is 6% p.a. and any attempt to increase or decrease the same would be considered unreasonable. Accordingly, your request that the proposed lowered rate of interest on loans extended to members of PAL Pilots Retirement and Benefit Plan for 6% p.a. to 3% p.a. be considered reasonable and, therefore, should not affect the tax exempt status of said plan is hereby denied for lack of legal basis. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner