BIR Ruling No. 409-15

December 14, 2015 BIR RULING NO. 409-15 Sec. 60 (B) NIRC; Section 109 (P) NIRC; CIR vs. GCL Retirement Plan, G.R. No. 95022; BIR Ruling No. ERP-040-2014; BIR Ruling No. ERP-111-2009 A.M. Sison, Jr. & Partners Suite Ayala Avenue, 1226 Makati City Philippines Attention: Atty. Antonio L. Cardio Gentlemen : This refers to your letter dated April 1, 2013 requesting a certification ruling that the sale by Coca-Cola Bottlers Philippines, Inc. Retirement Plan (the " Retirement Plan ") of its ownership of 16.72% undivided share, interest and participation in a parcel of land to one of its co-owners, Social Security System ("SSS") , is exempt from income tax under Section 600 (B) of the 1997 Tax Code, as amended, and from value-added tax (VAT) under Section 109 (1) (P) of the same Code, as implemented by Revenue Regulations (RR) No. 04-2007. It is represented that the Retirement Plan is a BIR-approved retirement plan pursuant to BIR Certification/Ruling dated December 28, 1981 and BIR Ruling No. ERP-111-2009 dated May 11, 2009; that the Retirement Plan is the owner of 16.72% undivided share, interest, and participation in a parcel of land with an area of One Thousand Eight Hundred Six (1,806) square meters located in Fort Bonifacio, Taguig City, covered by Transfer Certificate of Title (TCT) No. 41276 of the Registry Deeds for the Province of Rizal; that the aforesaid parcel of land is co-owned by the Retirement Plan with the AFP Mutual Benefit Association, Inc. (AFP-MBAI) and Social Security System (SSS);and that the Retirement Plan's undivided share in the land is approximately Three Hundred One Square Meters and Ninety Six Decimeter (301.96 sq.m.) ,representing 16.72% of the total area thereof. It is further represented that on March 28, 2013, the Retirement Plan entered into a Contract of Sale with the SSS for the sale of the former's 16.72% undivided share, interest and participation in the subject parcel of land for a consideration of Seventy Nine Million Seven Hundred Seventeen Thousand Four Hundred Forty Pesos (Php79,717,440.00). On the basis of the foregoing representations, it is now being requested that the sale by the Retirement Plan of the 16.72% undivided share, interest and participation in subject parcel of land to SSS is exempt from income tax under Section 60 (B) of the 1997 Tax Code, as amended, and from value-added tax (VAT) under Section 109 (1) (P) of the same Code. In reply, please be informed that the governing provision relative to the tax exemption of income derived by a retirement benefit fund is Section 60 (B) of the 1997 Tax Code, as amended, which states that: "Section 60(B). Imposition of Tax. (B) Exception. The tax imposed by this Title 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: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. CAIHTE The above-cited provision sets forth two (2) conditions in order that the earnings of a retirement fund may be exempt from income tax, to wit: 1) the contributions are made to the trust by the 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) 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 used for, or diverted to, purposes other than for the exclusive benefit of the employees. ( BIR Ruling No. ERP-040-2014 dated March 25, 2014).These two (2) conditions are sufficiently met by the Retirement Plan as in fact, this Office had already approved the same as a reasonable retirement benefit plan in BIR Certification/Ruling dated December 28, 1981 and BIR Ruling No. ERP-111-2009 dated May 11, 2009. It bears mentioning that the tax exemption of the income derived by a retirement fund from its investments had already been settled in the case of Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 95022 ,promulgated on March 23, 1992, where the Supreme Court upheld the judgment of the respondent Court of Appeals which affirmed the decision of the Court of Tax Appeals, the pertinent portion of which is quoted below: "...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 (R.A.) 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;" 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 R.A. 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 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. xxx xxx xxx" The above pronouncement of the Supreme Court was reiterated in the subsequent case of Miguel J. Ossorio Pension Foundation, Incorporated vs. Court of Appeals and Commissioner of Internal Revenue ,G.R. No. 162175, June 28, 2010. Accordingly, the Retirement Plan, being a reasonable retirement benefit plan established for the benefits of the employees of Coca-Cola Bottlers Philippines, Inc., is exempt from income tax on the sale of its 16.72% undivided share, interest and participation in the subject parcel of land in favor of the SSS pursuant to Section 60 (B) of the 1997 Tax Code, as amended. However, a retirement fund or pension trust is only entitled to exemption from income tax under Section 60 (B) of the 1997 Tax Code, as amended. Hence, it may still be subject to other applicable taxes imposed under other provisions of the same Code. It is noted, based on the Tax Declaration No. GL-019-00389 which was issued by the City Assessor of Taguig City, that the subject property's actual use is for commercial purpose. Accordingly, the sale of the Retirement Fund to SSS of the former's 16.72% undivided share, interest and participation in the subject parcel of land is subject to VAT pursuant to Section 106 of the 1997 Tax Code, as amended. DETACa Likewise, the sale by the Retirement Plan of its 16.72% undivided share, interest and participation in the subject parcel of land in favor of the SSS is subject to documentary stamp tax (DST) computed based on the actual consideration thereof pursuant to Section 196 of the 1997 Tax Code, as amended. Moreover, since the SSS enjoys exemption from the payment of DST, the Retirement Plan shall be the one directly liable therefor. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue