Commissioner of Internal Revenue vs. Court of Appeals

Employees' trusts that are exempt from income tax under Section 56(b) of the Tax Code, in relation to Rep. Act No. 4917, are likewise exempt from the final withholding tax on interest income imposed by Presidential Decree No. 1959, because a subsequent general statute cannot be construed as repealing a special or specific enactment granting tax exemption unless the legislative purpose to do so is clearly manifested.

The GCL Retirement Plan is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability, and death benefits to its employees. The Plan was submitted to and approved by the Commissioner of Internal Revenue as qualified and exempt from income tax in accordance with Rep. Act No. 4917, which exempts retirement benefits received by employees of private firms from all taxes. The statutory framework involves the interplay between Section 56(b) of the National Internal Revenue Code, which exempts employees' trusts from income tax, and successive presidential decrees imposing withholding taxes on interest income from bank deposits and deposit substitutes.

The GCL Retirement Plan (GCL) is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability, and death benefits to its employees. The Plan was submitted to and approved as qualified and exempt from income tax by the Commissioner of Internal Revenue in accordance with Rep. Act No. 4917. In 1984, GCL made investments and earned interest income from money market placements with Anscor Capital and Investment Corp. and from treasury bills with Commercial Bank of Manila, from which the fifteen percent (15%) final withholding tax imposed by Presidential Decree No. 1959 was withheld, totaling P11,302.19.

On 15 January 1985, GCL filed with the Commissioner a claim for refund of P1,312.66 withheld by Anscor and P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection of the 15% final withholding tax from the interest income because it is an entity fully exempt from income tax as provided under Rep. Act No. 4917 in relation to Section 56(b) of the Tax Code. The refund requested was denied, prompting GCL to elevate the matter to the Court of Tax Appeals.

The statutory history shows that Rep. Act No. 1983, effective 22 June 1957, amended Section 56(b) of the National Internal Revenue Code to exempt employees' trusts from income tax. Presidential Decree No. 1156, issued on 3 June 1977, first provided for withholding of tax at the source on interest on bank deposits but allowed a specific exemption for tax-exempt depositors. Presidential Decree No. 1739, effective 17 September 1980, carried over this exemption and preferential tax treatment while subjecting interest from bank deposits and yield from deposit substitutes to a final tax. However, Presidential Decree No. 1959, issued on 15 October 1984, amended these provisions and deleted the exempting and preferential tax treatment provisos, imposing a single 15% final tax on interest income from deposits, deposit substitutes, trust funds, and similar arrangements.

The Commissioner of Internal Revenue submitted that the deletion of the exempting and preferential tax treatment provisions under the old law clearly manifested that the single 15% rate was imposable on all interest incomes regardless of the tax status of the recipients, and that employees' trusts ceased to be exempt from 15 October 1984. GCL, on the other hand, contended that its tax-exempt status applies to all kinds of taxes, including the final withholding tax on interest income, and that this exemption is derived from Section 56(b) of the Tax Code, not from Sections 21(d) or 24(cc) as argued by the Commissioner.

• Effect of Deletion of Exempting Provisos: Petitioner argued that the deletion of the exempting and preferential tax treatment provisions in Presidential Decree No. 1959 is a clear manifestation that the single 15% rate is imposable on all interest incomes from deposits, deposit substitutes, trust funds, and similar arrangements, regardless of the tax status or character of the recipients thereof, and that employees' trusts ceased to be exempt from 15 October 1984.

• Reliance on Revenue Issuances: Petitioner relied on Revenue Memorandum Circular 31-84, dated 30 October 1984, and Bureau of Internal Revenue Ruling No. 027-e-000-00-005-85, dated 14 January 1985, as authorities for the argument that Presidential Decree No. 1959 withdrew the exemption of employees' trusts from the withholding of the final tax on interest income.

• Scope of Tax Exemption: GCL contended that the tax-exempt status of employees' trusts applies to all kinds of taxes, including the final withholding tax on interest income, and that this exemption is derived from Section 56(b) of the Tax Code, not from Sections 21(d) or 24(cc) as argued by the Petitioner.

• Tax Exemption of Employees' Trusts: Whether the GCL Retirement Plan is exempt from the final withholding tax on interest income from money placements and purchase of treasury bills required by Presidential Decree No. 1959.

• Tax Exemption of Employees' Trusts: Yes. The GCL Retirement Plan is exempt from the final withholding tax on interest income. The exemption springs from Section 56(b) of the Tax Code, in relation to Rep. Act No. 4917, and Presidential Decree No. 1959, being a general law, cannot repeal by implication this specific provision granting exemption to employees' trusts.

• Tax Exemption of Employees' Trusts: The Court upheld the exemption on several grounds. First, the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Rep. Act No. 4917, which provides that retirement benefits received by employees of private firms in accordance with a reasonable private benefit plan shall be exempt from all taxes. Second, Section 56(b) of the Tax Code, as amended by Rep. Act No. 1983, specifically exempted employees' trusts from income tax, and this exemption is unambiguous — the tax law has singled out employees' trusts for tax exemption. The raison d'être behind this exemption is that employees' trusts provide economic assistance to employees upon the occurrence of contingencies such as old age retirement, death, sickness, or disability, and the tax advantage was conceived to encourage the formation of such private plans for the benefit of laborers and employees outside the Social Security Act. Third, the deletion in Presidential Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates cannot be deemed to extend to employees' trusts, because said Decree, being a general law, cannot repeal by implication a specific provision granting exemption. The Court cited the rule that a subsequent statute, general in character as to its terms and application, is not to be construed as repealing a special or specific enactment unless the legislative purpose to do so is manifested. Fourth, all the tax provisions treated of come under Title II of the Tax Code on "Income Tax," and Section 56(b) explicitly excepts employees' trusts from "the taxes imposed by this Title." Since the final tax and the withholding thereof are embraced within the title on "Income Tax," the trust must be deemed exempt therefrom; otherwise, the exception becomes meaningless. Finally, the Court noted that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt, and if an employees' trust enjoys a tax-exempt status from income, there is no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place. The Court also found that reliance on Revenue Memorandum Circular 31-84 and BIR Ruling No. 027-e-000-00-005-85 was misplaced since Presidential Decree No. 1959 did not have the effect of revoking the tax exemption enjoyed by employees' trusts.

• Doctrine of Implied Repeal — A subsequent statute, general in character as to its terms and application, is not to be construed as repealing a special or specific enactment, unless the legislative purpose to do so is manifested. This holds true even if the provisions of the latter are sufficiently comprehensive to include what was set forth in the special act. The Court applied this doctrine to hold that Presidential Decree No. 1959, being a general law, could not repeal by implication the specific provision of Section 56(b) of the Tax Code, in relation to Rep. Act No. 4917, granting exemption from income tax to employees' trusts.

• Tax Exemption of Employees' Trusts — The tax-exemption privilege of employees' trusts springs from Section 56(b) of the Tax Code, which explicitly excepts employees' trusts from "the taxes imposed by this Title." Since the final withholding tax and the withholding thereof are embraced within Title II on "Income Tax," employees' trusts must be deemed exempt therefrom; otherwise, the exception becomes meaningless. The exemption is justified by the raison d'être behind the creation of employees' trusts — to provide economic assistance to employees upon the occurrence of contingencies such as old age retirement, death, sickness, or disability, and to encourage the formation of private plans for the benefit of laborers and employees outside the Social Security Act.

• "The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is unambiguous." — This passage identifies the statutory source of the employees' trust exemption and emphasizes its clarity, establishing that the exemption is specific and not subject to interpretive doubt.

• "Said Decree, being a general law, can not repeal by implication a specific provision, Section 56(b) now 53 [b]) in relation to Rep. Act No. 4917 granting exemption from income tax to employees' trusts." — This is the core ratio decidendi, applying the doctrine of implied repeal to hold that Presidential Decree No. 1959 did not revoke the specific tax exemption granted to employees' trusts.

• "If an employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place." — This passage articulates the practical rationale against imposing a withholding tax on income that is exempt from taxation, underscoring the inconsistency of the Commissioner's position.

• Commissioner of Internal Revenue vs. Visayan Electric Co., G.R. No. L-22611, 27 May 1968, 23 SCRA 715 — Cited in the explanatory note to Rep. Act No. 1983 to show the legislative intent that tax exemption is likewise to be enjoyed by the income of the pension trust, supporting the Court's interpretation of the exemption's scope.

• Villegas vs. Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA 190 — Cited as controlling authority for the doctrine that a subsequent statute, general in character, is not to be construed as repealing a special or specific enactment unless the legislative purpose to do so is manifested.

• Section 56(b), National Internal Revenue Code (as amended by Rep. Act No. 1983) — The provision that exempts employees' trusts from the tax imposed by Title II on Income Tax, provided that 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 the plan. The Court held that this specific exemption could not be impliedly repealed by a general law.

• Rep. Act No. 4917 — The law providing that retirement benefits received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes. The Court held that this law, in relation to Section 56(b) of the Tax Code, is the source of the employees' trust exemption.

• Presidential Decree No. 1959 — The decree that amended certain sections of the National Internal Revenue Code to impose a 15% final tax on interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, and which deleted the exempting and preferential tax treatment provisos. The Court held that this general law could not repeal by implication the specific exemption granted to employees' trusts.

• Presidential Decree No. 1739 — The decree that subjected interest from bank deposits and yield from deposit substitutes to a final tax but carried over the exemption and preferential tax treatment for tax-exempt entities. The Court noted that this decree's provisos were abolished by Presidential Decree No. 1959.

• Presidential Decree No. 1156 — The decree that first provided for the withholding of tax at the source on interest on bank deposits but allowed a specific exemption for tax-exempt depositors. The Court noted this as part of the statutory history of the withholding tax provisions.

Narvasa, C.J., Gutierrez, Jr., Cruz, Paras, Feliciano, Padilla, Bidin, Griño-Aquino, Medialdea, Regalado, Davide, Jr., Romero and Nocon, JJ., concurred.