DOJ Opinion No. 040, s. 1993

DOJ OPINION NO. 040 , s. 1993 March 19, 1993 Mr. Walfrido A. Alampay Officer-In-Charge Bureau of the Treasury Intramuros, Manila Sir : This has reference to your query regarding the Supreme Court decision in G.R. No. 95022, "Commissioner of Internal Revenue versus The Hon. Court of Appeals, et al.", dated March 23, 1992, holding that employees' trusts are exempt from final withholding tax on interest income from money placement and purchase of treasury bills. LLjur You state that the above ruling does not mention specific government securities to accommodate employees' trust placements; that the National Government, through the Bureau of the Treasury, contemplates the issuance of treasury bills designed for employees' trusts investments at an interest rate equivalent to the after-tax yields on treasury bills auctioned off to dealers; and that in this connection, your request the legal opinion of this Department on the following questions: "1) Can the non-mention of the specific security issue to accommodate employees be interpreted to mean at NG's option, as the issuer, taking into account the cost consideration to be shouldered by the NG?' and "2. Whether or not the yield/interest on the specific security issue computed on after-tax basis will mean a diminution of accumulated income and reduce whatever the trust beneficiaries would receive out of the trust funds, to equalize the yields obtained by the non-tax-exempt institutions?" As we see it, the real issue involved herein is whether or not the contemplated sale of treasury bills abovestated would contravene the ruling in question. We believe not. The subject ruling simply says that the income derived by employees' trusts from money placements and purchase of treasury bills is exempt from the payment of the final withholding tax on interest income from such transactions imposed in P.D. No. 1959. The reason is that the "taxation of those earnings would result in a diminution of accumulated income reduce whatever the trust beneficiaries would receive out of the trust fund", which "would run afoul" with the intention behind R.A. No. 1983, the statute conferring the tax advantage. prcd We believe that the foregoing pronouncement does not preclude the government from issuing treasury bills especially designed for employees' trusts the interest/yield of which is equivalent to the after-tax interest/yield of treasury bills currently sold to dealers. It is noted that under the enabling law for the issuance of such securities, the Secretary of Finance is empowered to prescribe the terms and conditions of such issue (Sec. 1). The sale of securities is a commercial undertaking of the government duly authorized by law and, to our mind, the prerogative given to the Secretary of Finance in fixing the terms and conditions for a particular type of debt paper includes both the rate of interest thereon and to whom the same shall be offered for sale. Thus, as long as this kind of treasury bill is available for purchase by interested buyers who are similarly situated, there can be no valid objection to its issuance. Moreover, the fact that the planned treasury bills specially intended for employees' trusts have lower yields than those presently available in the market does not mean diminution of the income of such trusts. This is because the earnings they will obtain from the purchase of such securities are what they expect to acquire at the inception of the purchase. There is thus no reduction of earnings to speak of. It is so unlike the situation involved in the subject decision where the interest income earned by employees' trusts from purchase of treasury bills was reduced by reason of the imposition of withholding taxes. Please be advised accordingly. Very truly yours, (SGD.) FRANKLIN M. DRILON Secretary