Commissioner of Internal Revenue v. GCL Retirement Plan, Represented by Its Trustee-Director

SECOND DIVISION [CA-G.R. SP No. 20426. August 27, 1990.] (C.T.A. Case No. 3888) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . GCL RETIREMENT PLAN, REPRESENTED BY ITS TRUSTEE-DIRECTOR and THE COURT OF TAX APPEALS , respondents . D E C I S I O N LAPEA , JR ., J p : Originally filed with the Supreme Court, this Petition for Review on Certiorari seeks a review of the decision dated December 15, 1986 of the Court of Tax Appeals in CTA-3888 entitled "GCL Retirement Plan, represented by its trustee-director vs. Commissioner of Internal Revenue," ordering petitioner Commissioner of Internal Revenue to refund to respondent GCL Retirement Plan the sum of P11,302.19, representing withholding tax on income from money market placements and purchase of treasury bills, imposed pursuant to PD 1959. The petition was referred to this Court for consideration and adjudication on the merits in a resolution of the Supreme Court dated March 26, 1990. The facts of the case as found by respondent Court are as follows: "The facts are not disputed. It appears that petitioner GCL Retirement Plan, is an employee trust set up by the employer for the exclusive benefit of its employees, to provide them retirement pension, disability and death benefits. The plan as submitted was approved and qualified as exempt from income tax by respondent pursuant to Republic Act No. 4917. (Please see Exh. H & H-1, pp. 88-90 CTA rec.). In 1984 petitioner made the following investments and earned from the same interest income (ANNEX C-D-2, inclusive and ANNEX E, pp. 15-20 and p. 30, respectively, CTA rec.) from which was withheld the 15% final withholding tax imposed pursuant to Presidential Decree No. 1959 which took effect on October 15, 1984, to wit: Income 15% Tax Date Kind of Investment Principal Earned Withheld ACIC 12/5/84 Market Placement P236,515.32 P8,751.06 P1,312.66 10/22/84 Market Placement 324,632.75 9,815.89 1,472.38 11/19/84 Market Placement 225,886.51 10,629.22 1,594.38 11/23/84 Market Placement 344,448.64 17,313.33 2,597.00 12/5/84 Market Placement 324,633.81 15,077.44 2,261.52 COMBANK Treasury bills 2,064.15 P11,302.19 ========= Petitioner filed a claim for refund with respondent on January 15, 1985 of the amounts of P1,312.66 withheld by Anscor Capital and Investment Corporation and P2,064.15 by Commercial Bank of Manila. (Exh. O, pp. 120-122, CTA rec.) On February 12, 1985, it filed a second claim for refund of the amount of P7,925.38 withheld by Anscor Capital Investment Corporation (Exh. P, pp. 123-124, CTA rec.) stating in both letters that it disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax as provided under Republic Act No. 4917 in relation to Section 56(b) of the Tax Code." The sole issue presented to respondent Court for resolution whether or not petitioner is exempt from withholding tax on income from money placement and purchase of treasury bills imposed pursuant to P.D. 1959. As stated earlier, respondent Court ruled in favor of private respondent and ordered petitioner to refund the sum of P11,302.19 representing the 15% final tax withheld. Petitioner now contends that before October 15, 1984, Section 21(d) and 24(cc) of the Tax Code granted to employees trusts enjoying exemption from income taxes, private respondent included, exemption from the final tax withheld on interest on bank deposits and yield from deposit substitutes. This grant of exemption, however, was revoked on October 15, 1984 upon promulgation of PD 1959 imposing 15% withholding tax on interest from bank deposits and deposit substitutes, which include income from money market and from purchase of treasured bills. Thus, respondent Court erred in finding that the grant of exemption in favor of employees' trusts was not repealed with the promulgation of PD 1959. Respondent Court further erred in relying upon Republic Act 4917 providing for exemption from any tax retirement benefit of employees on private employment in relation to Sec. 2(b) of the Tax Code, which provides for exemption in favor of employees' trusts from any kind of tax on income of estates. PD 1959 which took effect on October 15, 1994 subjects to the 15% final withholding tax interest income derived from money market, placement and purchase of treasury bills. Pertinent portions of the decree are quoted below: "SEC. 1. A new Subsection (y) is inserted in Section 20 of the National Internal Revenue Code to read as follows: '(y) 'Deposit substitutes' shall mean an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs of the needs of their agent or dealer. These promissory notes, repurchase agreements, certificates of assignment or participation and similar instrument with recourse as may be authorized by the Central Bank of the Philippines, for banks and non-bank financial intermediaries or by the Securities and Exchange Commission of the Philippines for commercial, industrial, finance companies and other non-financial companies; Provided, however , that only debt instruments issued for interbank call loans to cover deficiency in reserves against deposit liabilities including those between or among banks and quasi-banks shall not be considered as deposit substitute debt instruments. "SECTION 2. Section 21 (d) of this Code, as amended, in hereby further amended to read as follows: '(d) On interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements . Interest from Philippine Currency Bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements whether received by citizens of the Philippines or by resident alien individuals, shall be subject to a 15% final tax to be collected and paid as provided in Sections 53 and 54 of this Code. SECTION 3. Section 24 (cc) of this Code, as amended, is hereby further amended to read as follows: (cc) Rates of tax on interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements . Interest on Philippine Currency deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements received by domestic or resident foreign corporations shall be subject to a 15% final tax to be collected and paid as provided in Sections 53 and 54 of this Code. SECTION 4. Section 53 (d) (1) of this Code is hereby amended to reads as follows: (Sec. 53 (d) (1). Withholding of final tax . Every bank or non-bank financial intermediary or commercial, industrial, finance companies, and other non-financial companies, authorized by the Securities and Exchange Commission to issue deposit substitutes shall deduct and withhold from the interest on bank deposits and yield or any other monetary benefit from deposit substitutes a final tax equal to fifteen (15%) per centum of the interest on deposits or yield or any other monetary benefit from deposit substitutes and from trusts fund and similar arrangements." Before the issuance of PD 1959, Secs. 21 (d) and 24 (cc) of Tax Code read as follows: "(d) On interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements . Interest from Philippine Currency Bank deposits and yield or any other monetary benefit from deposit substitutes and from trust and similar arrangements whether received by citizens of the Philippines or by resident alien individuals, shall be subject to the final tax as follows: (a) fifteen per centum (15%) of the interest on savings deposits, and (b) twenty per centum (20%) of interest on time deposits and yield or any other monetary benefits from deposit substitutes and from trust fund and similar arrangements, which shall be collected and paid as provided in Sections 53 and 54 of this Code: Provided , That no tax shall be imposed if the aggregate amount of the interest on all Philippine Currency deposit accounts maintained by a depositor alone or together with another in any one bank at any time during the taxable period does not exceed One Thousand pesos (P1,000.00) a year or Two hundred fifty pesos (P250.00) per quarter; Provided, further , That if the recipient of such interest is exempt from income taxation, no tax shall be imposed and that, if the recipient is enjoying preferential income tax treatment, then the preferential tax rates so provided shall be imposed." (cc) Rates of tax on interest from deposits and yield from deposit substitutes . Interest on Philippine Currency Bank deposits and yield from deposit substitutes received by domestic or resident foreign corporations shall be subject to a final tax on the total amount thereof as follows: (a) 15% of the interest on savings deposits; and (b) 20% of the interest on time deposits and yield from deposit substitutes which shall be collected and paid as provided in Sections 53 and 54 of this Code: Provided, That if the recipient is enjoying preferential income tax treatment, then the preferential tax rates so provided shall be imposed." The exempting proviso reads: " Provided, That if the recipient of such interest is exempt from income taxation, no tax shall be imposed and that, if the recipient is enjoying preferential income tax treatment, then the preferential tax rates so provided shall be imposed." It is the position of petitioner that those exempt from income taxation were also exempt from the withholding tax on interest on deposits and yield from deposit substitutes granted under Sec. 21 (d) and 24 (cc) of the Tax Code. However, with the promulgation of PD 1959 the exemption from withholding tax and interest on the deposits and yield deposit substitutes was withdrawn when the said presidential decree deleted the exempting and preferential tax treatment provisions under Section 21 (d) and 24 (cc) of the Tax Code. In support of this contention, petitioner cites Revenue Memorandum Circular 31-84 dated October 30, 1984 and BIR Ruling No. 027-e-000-00-005-85 dated January 14, 1985 of the Bureau of Internal Revenue (BIR), which states: ". . . The deletion of the exempting and preferential tax treatment provisions under the old law is clear manifestation that the single 15% rate is imposable on all interest incomes from deposits, deposit substitutes, trust funds and similar arrangements regardless as to the tax status or character of the recipients thereof. Accordingly, the authority granted by this Office to depositary banks to forego withholding of the tax on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes maintained by trusteed retirement plans, persons, or entities exempt from income taxation is deemed revoked as of October 15, 1984, the effectivity date of P.D. 1959 . . ." Petitioner contends further that the tax exemption under Republic Act 4917 cannot be invoked by private respondent, as the tax exemption under Rep. Act 4917 applies only to retirement benefits received by officials and employees of private firms in accordance with a private benefit plan maintained by the employer duly approved by and registered with the BIR. The tax exemption does not attach to the income on retirement plan. The law which exempts employees' trust funds from income tax is Section 56 (b) of the Code, an amendment introduced by Rep. Act 1983 which took effect on June 22, 1957, the pertinent provisions of which are quoted below: "SEC. 56. Imposition of tax . (a) Application of tax . The taxes imposed by this Title upon individuals shall apply to the income estates or of any kind of property held in trust, including (1) . . . (2) . . . (3) . . . (4) . . . (b) Exception . The tax imposed by this Title shall not apply to employees' 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 earning 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 of 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." At the time Sec. 56(b) was incorporated in the Tax Code, the Code did not impose withholding tax on interest on bank deposits and yield from deposit substitutes. Withholding tax was first imposed on interest on bank deposits upon issuance of PD 1156 amending Section 53 of the Tax Code on June 3, 1977, in order to maximize the collection of income tax on interest on bank deposits. However, the decree also provides that in cases where the depositor is tax exempt or enjoying preferential treatment under existing law, the withholding tax shall be refunded or credited as the case may be. In other words, a tax-exempt depositor, such as an employees' trust under Section 56 (b) of the Tax Code, was exempt from the withholding tax. Subsequently, this exemption was carried over to Sections 21 (d) and 24 (cc) of the Tax Code with the issuance of amendatory Presidential Decree No. 1739 on September 17, 1980, providing, among others, for final withholding tax on interest on savings and time deposits and yield from deposit substitutes of 15 per cent and 20 per cent, respectively, but retaining the proviso regarding tax-exempt recipients and those enjoying preferential tax treatment. PD 1739 was issued to provide adequate incentives for long-term funds. After a careful scrutiny of the applicable laws, We agree with respondent Court that employees' trusts maintained by the employers and forming part of the retirement, pension, stock premium or benefit plan for the exclusive benefit of employees are exempted from the withholding tax. The income from money placement and interest bills is not subject to the 15% final withholding tax. There is nothing in PD 1959 that suggests the repeal of the exemption of retirement and/or pension trusts under Sec. 26 (d) of the Tax Code in relation to Rep. Act 4917 from income tax. The deletion under PD 1959 of the proviso in Sec. 21 (d) and Sec. 24 (cc) of the Tax Code referring to exemption and preferences rates of income tax does not suggest the repeal of the exemption expressly granted by law to employees' retirement plan and trust fund, because said proviso are not the source of the law that grants exemption from income compensation of employees' retirement plans under Sec. 56 (b) of the Tax Code. We likewise agree with respondent Court that PD 1959 which is a general law cannot repeal by implication a specific law granting exemption of employees' retirement plans and trust funds from income tax under Sec. 56 (b) of the Tax Code in relation to Rep. Act 4197, which was approved and made effective on June 22, 1957 and June 17, 1967, respectively, long before the issuance of PD 1959. It will be recalled that before P.D. 1739 was issued in September 1980, interest from bank deposits as well as all other income from purchase and sale of market instruments was taxed under the Tax Code as part of the taxable gross income of the corporation. However, the issuance of PD 1739 introduced the idea of imposing a final withholding tax of 15% or 20% on interest income derived by corporation on bank deposits as well as income from what they call deposit substitutes. At that time, exemption from the withholding tax on interest on bank deposits not exceeding P350.00 a year was provided under Sec. 53 of the Tax Code. As clearly expressed in the "whereas" clause of PD 1739, the purpose of the issuance of said declaration was to restructure the banking system to allow it to re-channel its resources to long-term investments and the need for more long-term funds to support the investment and credit requirements of industry and agriculture. There was nothing in the said declaration which suggested that there was a need to repeal the exemption theretofore enjoyed by employees' retirement plans. The proviso in P.D. 1739 was deleted by PD 1959, although it reproduced the rest of the paragraph imposing a uniform 15% tax on bank interest and yield of deposit substitutes. If at all, the only exemption that would be repealed was that enjoyed by the interest below the cut off amount of P800.00 a year, because that exemption drew its life from the proviso that was deleted by PD 1959. hence, as long as the law granting exemption from income tax is not expressly repealed, the exemption of employees' retirement pension plans remains. The deletion of the proviso found in PD 1739 by PD 1959 does not carry with it the revocation of the exemption, as implied repeal is not favored. There is a distinction between income tax as imposed by the taxing provision in Section 24 and the so called withholding tax found in Section 53 of the Tax Code. The taxing provision is the source of the tax imposed. It is the expression of the will of the sovereign to create and impose the tax. Without such taxing provision there is no tax to collect. On the other hand, the withholding tax provision is merely a device for collection of the tax so imposed by the taxing provision. The exemption from operation of the tax per se is generally found in the taxing provision. Exemption from the withholding tax as a device for collection is similarly found in the withholding provision. What PD 1156 did was to provide for the expanded application of the device for the collection to cover also the existing income tax on interest but at the same time tax exemption or preferential rates continue to be exempt or continue to enjoy the preferential treatment as the case may be. Finally, it is wee-settled that the interpretation of the provision of PD 1959 by the implementing agency (the BIR in this case) is generally accorded respect by the court. However, if such interpretation is erroneous, such as private respondent, then the Court has to intervene and correct such erroneous interpretation. This is inherent in the exercise of judicial power by the courts of justice. WHEREFORE, finding no reversible error in the decision under review, the same is hereby AFFIRMED. No costs. SO ORDERED. Melo and Martinez, JJ ., concur.