CTA Case No. 4244

DECISION

- 2 - In or about 1968~ Victorias Milling Co.~ Inc.

established a retir·ement. or· pension plan for its employees and those of its subsidiary companies pursu a nt to a 22-page plan.

Pursuant to s~id pension plan~ V.i.ctor·.i.as Milling Co., Inc. mt!\kes a regular financial contributions ' to the employee trust for the purpose of distributing or paying tn sai d emp 1 oyf?es, the earn ing!s and princ ipa 1 of the fund s accumulated by the trust in accord.:mce wi t.h ~~ai d pli:'\n.

Under the plan~ it is imposable~ at any time pr·· ior· to the satisf~::~c:t:i.on o ·f all liabilities with respect to employees under the trust, for any par· t of the cot- pus or income t.o be used for, or di verted to~ purposes other than for the exclusive of said employees.

Mor·eover, upon termina t ion of the plan, any remaining assets will be applied for· the benefit of all employees and their beneficiaries entit led thereto in proportion to the amount allocated for their· respective benefits as provi d e d i n s aid plan. The pr.? t:.i t.i.oner· and Victorias Milling Cn., Inc., on Januar·y 22!1 1970, entered into Memor a ndum of L~derstanding, whereby they agreed that petit: inner wou 1 d administer the pension plan fund s and assets, as assig ned and transferred to it

3 in tru s t~ as well as all amounts that may from time to time be set aside by Victorias Milling Co.~ Inc. "F o 1r· the be nefit the Pension Plan~ said Administration is to be s trictly to pur·s uant to the rules and requlations of the I Pension Plan and of the Articles of Incorporations and By L C:H•IS '' of pet.i t.ioner. This p e n ~. ion p 1 a n ~-<la s ther·ea ·f ter submit ted to the Bur eau of Intern a l Revenue for registration and f or a rulinq as to whether its income or earnings ;=1r·e e >:P.mpt ·from income ta >: pursuant to F:ep. Act 4917~ in relation to Sec. 56(b), now Sec. 54(b), of the f a:: Code.

In a lett.er- dated January 18~ 1974 addressf!d to Vi c torias Milling Co.~ Inc.~ the Bur·eau of Intern a l Revenue r uled that ":t;h§' inr.;om..~ _ .. Q.f _.:t. .. b~ .t. r~ L.1 .!5 .t.

.f.tl II q of ...... . Y.Q!cl r:: ....... r::~ .. t..:i. r:: ~met] :t; . __ 9~ .. 1J_f?f.! t. ....... P .. Lt!!.M --··-.i..?.. In ac cordance· ~-<lith petitioner'!!> Artie les of Incorporation (Anne>:

A), petitioner t~IOLil d "b9. .. tc! ..

2~u

DECISION —-

participants, the private pension plan. as established for certain. employees of Victorias Milling Co.. Ine. and other pension plans of Victorias Milling Co. affiliates and/or subsidiaries, the pension funds and a asthe accruals, additions and increments. thereto, and such amounts as may be set aside or accumulated of said pension plans. Moreover, pursuant to the same, Articles of Incorporations, petitioner is empovered to “settle, campromise or. arbitration, any. Claims, debts or damages due or Qwing to or from pension funds and assets and other funds and assets of the corporation, to commence defend suits or legal proceedings and to represent proceedings."

Fetitianer, through its investment manager, the City Trust Banking Corporation, has invested the funds af the employee trust in treasury bills, Central Rank bills, direct lending, etc. sn as to generate income or earnings for the benefit of the employees-beneficiaries of the pension plan. Frior to the effectivity of Fresidential Decree No. 195° on Octaber 1S, 1984, respondent did not subject said income or earnings of the employee trust to aude

- 5 - After Presidential Decree No. 1959 took effect on Oct.obe1r 15, 1984, r·espondent and/or the Bureau of Interna l Revenue began subjecting the income or e.-:lr-n.i.n<.:.:JS of t.he emp 1 nyee tr·ust he 1 d by pe:.•t.i. tioner- to income or ·final t-lit:.hholding tax and collecting from petitioner said final withholding taxes on the ground that Presidential Decree No. 1959 allegedly withdrew or repealed the tax exemptions of employee trust funds on their earnings. In v i£~11'1 of the po~5ition taken by r-espondent, respondent collected from petitioner, through the latter 's investment manager, final withholding ta xes consisting of: (1) Taxes withheld and remitted to the Bureau of Internal Revenue on account of direct lending of the employee trust fund, to wit: Anc:xJ.nt of Ta>:

R£\.t.f?._ .T5\_>:._.~~.:t .. t.b.~.t9.

f.3gm_.iJ;.t.~;L:t;Q_._I;:lJR Apdl ~ 1986 P100, 761.44 !'lay~ 1986 1~883.68 3Uu

DECISION —-

— & _ June. 1984 38,412.40 July, 1986 18,146.67 August, 1986 Seal. 91 September, 1984 79,592.71 October, 19BS 12,504.90 November, LORS 2,156.78 December, 1986 eg FOF January, 1987 to Tatal PS12, 633,40 as shown by a sworn certification of Rosario C. Capina of Citytrust Hanking Corporation (Annex E).

(2) YJaxes withheld by the Central Bank an Ac court of petitianer’s employee trust fund investment ain Treasury Bills and/or Central Bank Bille, from January. 19846 ta June 36, 1987 in the total amount of F780,352.28, as shown by a sworn certificatian af Kasaria CC. Capino of Citytrust Ranking Corporation (Annex FF), which states in part that the "taxes were, and formed part of, the taxes withheld and remitted to the Bureau af Internal Revenue by the Central Bank, as appearing in the attached certification of the Central Hank dated December 11, 1987." The Central Bank remitted said taxes ta the Bureau of Internal Revenue by means of credit advice an November &, 19846, January 8, 1987, and from March &, 1987 to November §, 1987 (Annexes G and Gri).

It ais alleged that the collection from Us

- 7 - petitioner of final withholding taxes on the income and earni ng s of t.he employee trust held by petitioner vio l ates Sec.

54 (b) ' for·merl y Sec.

56 (b) , of the Ta >: Code as this provision exempts from income or withheld tax earninqs of employee or r ension trunts.

ThP.

b;n:es, ther·efore, collected above are allegedly wrongfully collected. Thi s is because , while as a general rule, Sec. '2l(c), Sec.

21 (d) • of the Ta>:

Code subj Pc ts '" ll interests and yields from deposit subst.:itute to final 11Jithholding t..:\}:, Sec, 54(b)~ form e r~ ly Sec. 56(b), of the T.::n: Code e>:empt from income tax the income or earnings of employee trust func:ls, as r.~n e >:cept.ion to the genera 1 ru 1 e. The employP.e trust fund held by petitioner for the benp ·f.i.t of t.he employees of Victorir.~ Milling Co., Inc.

an d its subsidiaries qualify as ta>:

e>:empt und e r·· Sec. 51J.(b), ·formerly Sec. 56(b ), of theTa>: Code as rul e d by res pondent Commissioner himself in hi s elated January .18, .1974 (Anne>:

D).

Hence, the said ta xes collected from petitioner above-mentioned were al l egedly wrongfully collected c':\nd shnu ld ther·efore be refunded to petitioner. SP.rtion 54(b) of the Tax Code exempts earnings of employee trust from income tax, since !Said 3U~

- 8 - prov.i.s .ion did not any distinctions or qual.if.i.cations as t.o the kind of l.ncome tax that would be collected ~ nor as to the kind of earnings of employee trust that are exempt from income tax~ then income tax includes final withholding tax~ and I earning s include interests and yields from deposit substitute which should be accordingly exempt from final withholding tax.

Con trar·y to respondent's position and to BIR Ruling No. 006 dated January 14~ 1986, Presidential Decree No.

1959 d.id not.

impliedly r-epeal the e>:emption fr·om final "lithholding ta>:

on inter-est income and yields from deposit substitute of employee trusts he ld by petitioner- not only because .impl iecl n::>pea 1 ~; are not favored~ the pr-esumption being against implied r-epeals, but also because Sec.

54(b)~ for·merly Sec.

56(b)~ of the Tax Code was left untouched by Presidential Decr-ee No. 1959. Moreover , Pr-esidential Decr-ee No. 1955 as clar-ified by Min ist:.r·y cd Finance Or-der- No.

39-84 and !?.}:!.~ .lll.E.t..J . .9..!:l_§ __ ·-····CJ.~.!J.~. r:.~_LJ..Y. .-'- . e>:pressly pr-eserve, e>:ceptions thereto, those tc:n: e>:emptions pr-ovided in the Tax Code~ one of which is the exemption from income tax of ear-nings of employee tr-ust funds

DECISION —-

under Sec. S4(b), formerly Sec. S6(b) thereof. While FD. Mo. 1959 expressly amended. Sec, om el(d). now Sec. Z2l(c), of, the Tax Code by deleting the provision, exempting from, final, withholding ta» bank interests and yields from deposit substitutes and from trust fund, said deletion or amendment, did nat operate to withdraw nor. repeal. the tax exemptions on. interest income. and yields from depasit suhstitutes of employee trusts because employee trust funds enjoy income tax exemption not by virtue of Sec. 21(d), mow Sec. 21(c), of. the Tax Cade, but by virtue of Sec. 54(b6), formerly. Sec. S6(b) af said Code, which latter provision remains in farce so that it has not been amended. nor repealed.

Section 34(b), formerly GSGec,. 346(6), af the Tax Cade remains therefore in force and the tax exemptions therein pravided in favar of employee trust remain unaffected by F.D. No. 19599. This conclusian is reinforced by the fact that F.D. No. L994 arc Fen. Order No. ees recognized, maintained, re-enacted, ar reradopted Sec. S4(b) formerly Gec,. S4é&(bh) af the Tax Code.

Th A letter dated September 21, 1987, petitioner filed with respondent a claim for refund dU

- 10 - of taxes wrongfully collected from petitioner.

(Ann F.:>>: H) In letter dated September 21~ 1987, respondent Commissioner· of Internal Revenue asked petitioner to submit. supporting documents showing the taxes withheld and remitted tb the BIR. (Anne>:

I) In a letter dated January 22~ 1987, petitioner submitted to respondent~ ~IJ. ____ _ E.mg..o.9!"?.<::1. _______ c:::_l ... ~ . .tm ........ J.9...c r.::!'?..f_IJt)Q __ gf ____ t~ 9XI?~ praying that the ta>:es collected from petitioner as above stated, in the total amount of P1,092,985.68, be refunded to it and presented documents in compliance with respondent's request contained in his letter dated September 21, 1987 (Anne>: I).

[Annexes E~ F, G and G-1] In letter dated February 29, 1988 to respondent Commissioner, petitioner made a follow- up of its claim for refund of tcu:es and stated, among others~ the following: "Inasmuch as under Sec. 243 of the Tax Code, suit for refund cannot be maintained for taxes paid to the BIR after two years from date of payment thereof, an action for refund of ta>:es paid to the BIR in April 1986 onward would be barred unless such suit is filed ~-<lith the Court o ·f T a>: Appea 1 s before or .i.n Apr-·il ~ 1988.

For· this reason~ unless the BIR acts favorably on claimant's claim for refund of taxes at least five 3Uv

- 11 - days before the end of March~ c l a.i.man t would be restrained to file the necessary a c tion with the Court of Tax Appeals for recov ery of s.:dd ta>u?s itemized in our said letter of January 22~ 1988~ in accordance with the ruling of the Supreme Cour·t in Gibbs vs. Collector of Internal Revenue~ 107 Phil. 232. "In vie~.>l of the fore9oing, it is respectfully prayed that the BIR act on claimant's claim for refund as embodied in our letter dated September 2~ 1987 and January 22, 1988, before the last week of March, 1988, failing which claimant will t a ke it that the BIR has denied its claim for refund and claimant will then be free to file the neces sary action in the Court of T a>: Appea 1 s."

(Anne>: I<) Nc)twi t.hstand ing petitioner ' s letters of ~J anuar·y 22, 1988 (Anne>: J) and February 29, .1988 (Annex K), respondent Commissioner failed to act on petitione r' s claim for refund of taxes. Sinc e the Bureau of Internal Revenue did not act: on petitioner· s c 1 aim for refund, peti t.i.oner filed the instant judicial claim for taxes paid up to June 3 0~ 1987.

~H t.h r·espec t to those f i.na 1 ta>:es paid after June 30~ 1987, the parties have sti.pulated that the same ~·li 11 be subject to the final outcome of the instant case, to the effect that said taxes will be r·efunded if petitioner- wins the case without the need on its part to file a claim for refund 3Uu

- 12 - therefore with the Bureau of Internal Revenue and a s uppl e mental petition lfd t.h the Court of Tax Appeals.

The par-ties have de ·f i.ned the issues for deter .. mination in their stipulation of facts dated November 14~ 1988, as follows:

(a) Under what section or provision of the Tax Code do or did the interests on cli.rf"!ct l oans (Anne>: "E" of Petition) a nd yields from bank deposits and deposit s ubr:; t..i.t.utes on T- bills (Anne>:

"F" of Petitio n) of the tru s t funds of the pe nsion plan enjoy e>:emption from income or· f i n a 1 t a >: ':> (b) Did PD 1959 repeal or withdraw the e >:emption ·from ta >: on interests and yields from bank deposits and deposit substitutions of said trust funds of the pension plan administered by petitioner? ( c::)

Assuming arguendo that PO 1959 r-epealed or 1-'Jithdn:w said ta>: e>:emption ~ did not PO 1994 an d E>:ecutive Order No. 273 re v ive said tax exemption on earnings of the trust funds of the pension plan? contends that the interest on direct loans and yields fr·om bank deposits and deposit substitutes on Treasury Bills of the trust funds of the pension plan of petitioner enjoys exemption from income or ·final ta>: under Section 56(b)~ now Section 54(b), of the Ta>: Code.

It asserted that the pension plan in question

- 13 - w~s prev iously submitted to the Bureau of Internal Pf'.'venue ·for·· '"' r .. 1..1l ing as to v1hether the income or e i"rn :i.nq <::.

of t.hF? retir·ement funds of said plan are e xempt from income tax and in a letter dated .18, 1984, the Bureau ruled that.

the I E>i''I'"Tl.i.ngs of the tru s t funds of the pension plan are e x empt fr o m income tax under Sec. 56(b ) of the Tax Co d e .

"A close r·F?v ievJ of the pt-o v isions of th e pl r.m and tt-ust instrument disclose th a t in reality the corpus and income of t:hP.

t.t- ust ·fund a re not at. no time used for·· , or· di v er-ted to, any purpose other· l.h ;:"n f ew the P >: c:lu s ive b e nefit of the pl a n benPfi c .i. c;~ rie s .

This fact WC\S l.il :: e~t ,•i s e confir·me d after- verification of the plan ope t- ,"'t.ions by the Revenue Di s tr i ct No. 63 of the Re v enue Region No. 1'l, Bar: olod City.

SF>ct.ion X also c c>rdinns. thi s fact b y pt- oviding that if .~ n y asset s r·· pmr.:~in ,:;dter satisfaction of the requirements of all the above cl a u ses , such remC\ining assets will be '" ppl.:\.ed for the ben e fits o f a 11 persone;.

.i n c luded :i.n S \I C: h cla o=.:.s es in proportion to t:.hP ,"\ mount:. ~.

all oca t:. P.d for their r P~ p ec ti v P benefits pursuant to the fnr e g o ing prior i ties. "In v iPvJ r..1 f r."ll thP. ·foregoing, this Offi c e ic;

of the orinion, as it hereby h o lrl s , that thP. income of the trust fund of y our retirement benefit plan is exempt from income tax pursuant to Republic Act 4917 in relation to Section 56(b) of the T<~ > : Code."

(Anne>: "D" of F'eti t.ion) Bec t.inn 5 6(b), nr.) ~.,. Section 54(b) ~ of the Ta :-:

Code~ 1-'lhich is cited by the BIR in the Ruling of 3Uu

- 14 - "(b) E.:.:l!t:: _~R.ti.9.fl· - The Tax imposerl by thj s Title shall not apply tc 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 t:o the tr·ust by !?UCh employer~ or employees~ or both for the purpose of distributing to such e~ployees the r.?.arning s and principal of the fund accumulated by the trust in accordance ~.-l.ith such plan, and (2) if under the trus t instrument it is impossible, at any time prior to satisfaction of all liabilities with respect to employees under- tr·ust, for any part of the corpus or income to be (within the taxable year or thereafter) used for~ or diverted to~ purpos es other than for the exclu5ive benefit of his employees: Provided~ That any a mount actually distributed to any e mployee or distributee shall be taxable to him in the year in which so di s tr i buted to the extent that it exceeds t.he a mount contributed by such employee or· di s t.ributee."

After the enactment of PO 1959 on October 15, .1984~ the Bun;:~a u of Internal Revenue~ through its w.i.thholding agents~ collected from petitioner final withholding taxes for the interest income from direct loa ns or direct lending of the pension ·funds, which ta>:es paid to the BLir-eau of Internal Revenue amounted to P312,633.40 from April, 1986 to June 30, 1987.

Petitioner is seeking for the refund of this amount of tax. In its BIR Ruling No. 334-87 dated November 3,

- 15 - 198 7~ the Bureau of Internal Revenue admitted that interest income of the retirement fund arising from direct loans is exempt from income a final tax pursuant to Section 56(b)~ now Section 54(b) of the T.cn: Code.

BIR Ruling No. 334-87 dated November 3~ 1987 reads as follows:

"This refers to your letter dated August 14, 1987 requesting a ruling a~ to whether interest income by the retirement fund from direct loans made by it are subject to the 20% withholding tax. "In reply thereto, I have the honor to inform you that income of retirement fund fr·om its .investments consisting o ·f interest from loa ns is exempt from income tax pursuant to Section 56(b) of the Tax Code~ as amended.

This is in 1 ine with Mini stry Order No.

39-84 which states that the wi t.hdrawa 1 of the e>:emption by P.O.

No.

1955 does not.

apply to eD:empt .. i.on s r.~mbodied in the National Internal Revenue Code." Petitioner conclu des~ to which We hereby agree~ that it is entitled to a refund of the amount of P312,633.40 representing interest income for direct loans made by the retirement funds of the pension plan.

1,-J.ith reference to the amount of P7B0,452.2B, representing the final ta>: on interests or yields from Treasury - Bills placement of the retirement fund paid by petitioner in 1986 and up to June 30~ 31U

- 16 - 1987 ~ as "lell as those paid by petitioner after ,June :30~ 1987~ the question is whether or not interests or yields from treasury bill placements of the pension funds are exempt from final tax. Petitioner claims that the interests or yields fo r Treasury Bill placements bf petitioner are exempt from final withholding tax under Section 56( b)~ now Section 54( b), of the Tax Code because this section e>:empts fr·om income ta>: all earnings and income of retirement funds.

And earnings include interests or yields from bank deposits and deposit substi tute~ such as treasury bills, or income fr·om "cap.i. ta 1 inve s ted~ gains~ prof .it or pri.v r.~t:.e r-evenue" citing the case of Fisher vs. Trinidad~ 43 Phil. 973, 981 • Payment of income tax .includes the withholding tax on income under Title II of the Tax Code.

It is under Section 56(b), now Section 54(b)~ of the Tax Code~ falling under Title I I, that the Bureau of Internal Revenue, in its

Ruling

dated ,January .18, 1974 said tha\t the earnings of the retirement funds of petitioner are exempt from income tax and not under any section or provi sion of the Tax Code. petitioner contends that.

PD No.

1959 did not repeal or 31J.

- 17 - withdraw the exemption from income tax of interests or yields from T- Bill placements of the retirement fund because Section 54(b)~ formerly Section 56(b)~ of thP.

T.:n:

Code~ t.olhich interests or yields are e>:empt. -from income ta>: and remained in force and has not been repealed.

r·espondent contends that the applicable pr· ovi~;ion is Section 21(d) and Section 24(c) c1·f the Ta>:

Code and not Section 56(b)~ now Section 54(b), of the Tax Code. Respondent claims as follows :

11 10. The e >:emption ·from the final ta x on interest on bank deposits and deposit substitutes which petitioner previous ly enjoyed was in pursuance of the a-fore- quoted proviso found in Section 21(d) and 24(cc) of the National Internal Revenue Code which expressly provided that 11 I ·f the rec .i.pient:. of such interest.

is £'-,>>:empt from income tc:n:ation ~ no ta>:

shall be .impo"',ed and that~ if the recipient is enjoying preferential income ta>: t.nO?atment, then the preferential tax rates so provided shall be imposed. 11 11. Pres.ir.:!entia 1 Decree No.

1959, whi c h took effect on October 15, 1984, amended the aforesaid sections by deleting the said proviso granting exemption from final tax on interest from bank deposits and/or deposit substitutes to those recipients who are exempted from income ta>:at..ion.

"12. By vir·tue of such amendment~ the exemption granted under sections 2l(d) .::\nd 24(cc) is deemed to have been repealed or w.it.hdrat,.ln. >!>!X ...

- 18 - 1--Je a gre e with pe tl tioner. In his BIR Rul.ing d a t e d J a nu a ry 18~ 1974~ respondent stated that the inc o me of the trus t fund of the retirement benefit plan i s from income pursuant to Republi c Act No.

481 7 ~ in relation to Section 56(b) of the Tax Code.

(Stipul a tion of Facts, par. 4, p. 1 20 ~ CTA rec.)

Unde r this BIR Ruling~ the interest income from T- bill plac ement of the retirement fund i s exempt f r om final tax. At the time the pension pl a n was es t a bli s hed in 1967 or thereabouts~ and at the t i me the BIR Ruling of ,January 18, 1974 was provi de a s follow s ~ res pecti vely: "Interes t from Philippine Currency b a n~ de pos its and yields from deposit s ubs titutes vJhe ther r-·ec:e .i.ved by citizens of the Phi l.i. pp.i.nes or by resident a 1 ien individuals, s ha ll be subject to the fin a l ta >: a s f o llows :

(a) 15% of the interes t on s av ings deposits~ and (b) 20% of the inte res t on time deposits and yi e ld from d eposit s ubs titutes, which s hall be collec ted and paid as provided in Sec tion s 53 and 54 of this Code:

Prov i ded, Tha t no tax shall be imposed if the aggr .. egat£::> amount of the interest on a ll Philippine Currency de~osit accounts maintained by a depositor alone or together with another in any one bank at any time during the ta>:able period does not e>:ceed Eight Hundred Pesos ( PBOO. 00) a year or Two Hundred Pesos (P200.00) per qu a rteJ~ ;

Provided~ Further, I.h~. :t., __ ,i,__f . _.:t;_t],!?. r:.~.~JPJ .. ~.IJ .. .t. .. ... 9..f .... . ?. .t,~ .. l:.h. .... J . .r.Lt.gr._~?.-!: .. _j ,_s. .... ~?.t~ .. f!:l.P..!:_._fr.P.ffi. ,i._f1 c;..9..1ll .. e:J. ... _t~~: .C\ .. t .. lqn ,__ .. _nP_ . ...t .~z:..._ g;_b~ .lL .J?~.--.!.mQ..g~.~Q. a nd th a t~ if the recipient is enjoying 3lv pn.?·f er·ent i a 1 pr·efer·en tia 1 be imposed."

- 19 - t.-a>:

tc:n:

treatment~ then the rate so provided shall " ( cc) Rates o ·f tc:n: on inter .. est from deposits and yield from deposit substitutes.

Interest on Philippine Currency bank deposits and yield from deposit substi t.utes received by domestic or resident foreign corporations shall be s ubject to a final tax bn the total .:~mount t.hel"·eof as follows: (a) 15% of the interest on savi ngs deposits; and (b) 20% of the interest on time depositg and yield from deposit substi tutes which shc:d 1 be col l ected and paid as provided in Sections 53 and 54 of this Codep Provided, That i :f .... t:J.lf:? .. .. .r..f:?~_:tpi.!?.D.t. .... 9. . .f._ .. .. ~.~.~h. J r:l.t:e.r-:f:?~t ....... ~· . ?. ....... .!:?.~!~ITlP t .. . f..f..:'9 .. 1Tl ..... JD. !;. Qffi.~_.J:. ~J:!~:t.i.,.QD. . ., qo .. J :a >.:. ~-b~JJ .. ... b~ ... _if!!P9.?..£.?.Q and that, if the recipient is enjoying preferential income ta:·:

treatment~ then the preferential ta>: r .. ate so provided s hall be imposed." the s e sections were inserted as new provisions only on September 17~ 1980 by PD No. 1739, and yet long before said date ($f:?J~ .. t . ~ .... . ,1,7..!1._ .. _.1. .9_~.~~), petitioner was already enjoying tax exemption on its interests or yields fr·om its in ve s tment in T-Bills and other deposit substitutes.

The a forequot.ed provisions of Sections 21 (d) and 24(cc) of the Tax Code, introduced by P.D.

1739, which took effect on September 17, 1980, cannot be the source of the tax exemption from petitioner ' s investments in T-B.ills and nthPr

- 20 - deposit subs titutes.

provisions do not refer- to earnings of retirement funds of pension plan. p he specific provision on the subject is SectiQ.Q 56(b), now Section 54(b), of the Tax Code under which the pension or- retirement I plan qual.ify as ruled by the BIR in its letter dated January 18, 1974.

In the ~-~-<;;.QDQ .... -.. PJ .. ~f. .~, petitioner's retirement fund has been enjoying tax exemption long before Section 21(d) and Section 24(cc) were enacted on September 17, 1980.

It cannot be claimed therefore that said Section 21(d) and Se ction 24(cc) were the source of petitioner's exemption from income tax. In the .th.:i,_r.:.c:LQ.J .~.~ ·~·' the prov iso in Section 21(d ) and Section 24(cc) of the T a>:

Co r.:l e to the e f f ec t that " J: .. f .. ___ 't;_b.E'L .r..~~ ... ~.P..!.~ .:t .... .Q.1 t..~ .. ~: ..... J!'i . .h S\.1. L ... PI? ...... AflU~.Q.§g_c;:! ___ ~.o. l;:!..._t. h t;\.!; ... L. .... i.f_ .. t..b.~._r_Et~ . !.P.! .~n_t. ... -~-5! :!-roP.9.l?.~. <::l ..

!t'~ is not a ta>t e>:empt provision. This is so because the proviso does not, by itself, gr~nt a tax exemption but points to another law, if any, as the source of t.a>t e>:emption. Without another law granting tax exemption on the subject, the proviso is meaningless and grants no tax e>:emption

- 21 - privilf:?ges at. all;

~odth another law granting ta>: ex emption, the prov i s o is a surplusage because what govern s and gr-ant s t.a >:

e >:emption is the separate law and not. the provi s o. In other words~ the source of tax exemption of I r e tire me nt e mpl o yee fund is Section 56(b)~ now Sec tion 54(b) ~ of the Ta >: Code. Thus~ even after the iss uanc e of PD 13 79 prov iding the new Sections 21 (d) and 24 ( cc) of the T a>: Code~ the Bureau of Inter·nal Revenue st111 holds that the income of retir e me nt or employe e trust is exempt from income tax und e r Section 56(b)~ now Section 54(b), of the T."' >:

C od E~ v1hen~ :i.n BIR Ruling No.

036 dated March .10~ 1 9 8 3~ it held "that CB Provident Fur1d i!.' an employ ees ' tru s t e x empt from income tax under Sec. 5 6 (b) of the Ta x Code and, therefore .~ it need not f.i .le a n in c om e ta x return .: that the income of the tru st 'from it s .inJ1e .s tments are exempt 'from income ta x provide d that in its inve s tment activitie!.':r no part o f' the corpu s or income of' the fund shall be diverted to purpose s other than the exclusive benefit of' the member employees or their benefi c iaries xxx."

Subsequently, PD 1959 was enacted, taking effec t on October 15, 1984, which deleted the 3lu proviso in 1994 in Section 2i(d) and Section 24(cc) of the Tax Code. Respondent claims that the "deletion of the exempting and preferential tax manifestation that the single 15% rate is imposable on,.all.. interest...income. from deposits. deposit substitutes, trust funds and similar arrangement, regardless as to the status or character of the recipient... thereof." (BIR Ruling No. O06 dated January 14, 1985) The stand taken by respondent is without basis in law. As was stated by petitioner:

yields. from. bank, S4(b). formerly Se f6(b)s5 of the Tax Code. The proviso is not an exempting tax provision because it does not, by itself, grant exemption from tax on such interest or yields, but relies on another law or provision. In other words, if there is a separate law or provision of the subject, the proviso is meaningless for what governs is the separate preavisian or law. If there is no such separate provision or law granting tax exemption. the proviso is meaningless because it does not by itself grant ta» exemption.

deposits and deposit 3 but Sec.

Moreover, FD 1959 did not repeal the following paragraph of Sec. 32 of the Tax Codes:

"(2) Depositors or placers/investors enjoying tax Sec.

- 23 - r::Pmption pr·· iv.i.leqe or- prefpr-ential t~M treatment.

In a ll r:,=,ses v1here the depns.i. t or or place/ investor- is ta ~· : ·-· P.J:empt or- is enjoy i n g prPferential income t ax treAtment under exi.sting law s~ th1-::.> ~·1i thh n ldinq t.:on: i mposed in thi s pA ragrap h s hall b~ r-ef1mded nr- credited , as the c::asF.~ may be upon submission to the Cn~missloner- of Inte r n a l RevPnue of proof that the said depositor-~ or placer/inves tor- is A tax exempt e nti ty or- enjoys a pr-efer-entia l income t.::D:

tr-eatment~ " Ptu·s1.1r1nt to the abov e pr-ovision, ·f .in;"'l tc:~>: ecs r.m jnter- e s t s o t- yie ld s ·from dPpos ·i.t s--ubstitutes o f ta:·: e>:empt persons cw en-t. ities~ l ike h e rein petitioner~ are Pfl t· .i t.l ed to a refund o ·f the ta::es paid thereon.

PO 1959 did not e~pressly or impliedly r-epeal 56 (h) ~ ncw1 Sec.

54(b)~ of the Ta >:

Code exempting the imposition of income tax on employee t.n.IS t:

on its inten=~st or· yie ld s fr o m T- Bill pl acements and deposit substitutes. We are in full agreement with petitioner when it asser ted tha t neither PD 1959 nor any subsequ~nt l a~-~ e>: prpc:;.s ly repealed Sec. 56 (b), now Sec. 54(b) o f the Ta>:

Code.

Said Section remains intact in force up to the present. But can it be correctly said that PD \959 imp l ied l y repea l ed t he ta x eMemption p r· ivileqes nf pension or e mpl oyee trust em its Jntet-ests m - y ields f rom T-Bill 3lo

- 24 - placements or deposit substitutes~ as r··espondent contends?

A number of considerations~ as herein below discussed, show a negative answer: l.

f~ _Y9..t.:::§:Q • J .. f!l.PJ .. :l_gg ____________________ r.::_~.P.~~- .L ___________ ,!_§: ___________ DQJ:. It is \.'Jell settled that r·epea ls of statutes by implication are not ·favored.

The prec:.umption 1s against implied r·epeal.

Hence~ , all efforts s hou 1 d be e >:er·ted to harmonize and give !? f ·fE·ct.

t:.o all la\o'JS on t:.he SLibject.

(Valdes vs.

Tuason~ 40 Ph11.

943;

Villegas vs.

Subido~ 41 SCRA 190).

Implied r·e pr.:~ al II'Jill not be decreed~ unless it i s manifest that the legi s lature s o clearly intended or unless the r·epu<_Jn anc y bet:.lo'Jeen two 1 a\o'JS 1 s not only irreconcilable but is also clear and convincing from the language used. (U.S.

vs. Palacio~ 33 Phil. 208). In the case at bar~ it is submitted that there is no inconsistency between PD 1959 and Sec.

54(b)~ formerly Sec. 56(b), o ·f the· Tc:D:

Code, nor is there a clear legislative intent to repeal Sec. 54( b), formerly Sec.

56(b)~ of the Tax Code. In f ac: t~ PD 1955 i=-sued on the same day as PD 1959, a•s clar·ified by Ministry Order 39 - 84~ pres erved tax exemption privileges of those provided in the Tax Code, one of I>'Jhich is Sec.

56(b)~ now Sec.

54(b)~ of said Code.

~~ • !?. .e.?~- - -~---····· ·········?4. .. U~J. . ~ ................ f_qr.!~.l.~.r.::.1y ____ §g_~-~ -- ;:::.~ __ (9 .. t .!l_. ______ is .... ;\!.L ..... !=?.?L<.=:..!=?..P .. t .:i.-Pn .... J::.Q. ....... l2 .~S:: .. ! ........ J::g ______ $f:'<;: _~_ :;:~,l,(!;J .. {J,.L. Pf. .. J:b..f?. .... .I~>.L .. ... G.R~Jg. - Sec. 21 (d) , now Sec.

21 (c)(1) of the Tax Code subjects all interests or yields from bank deposits and deposit substitutes to final tr=1>:

(15/. from October 15, 1984 to December 31, 1985 per PD 1959;

17-1/2/.

from January 1, 1986 to July 31, 1986 per PD 1994; and 20/. from August 1, 1986 per E:.>:.

0n1e1·· No.

37) ~ w.i thout qualifications.

It is, for this reason, a genera 1 provision.

On the other hand, Sec. 54(b), formerly Sec. 56(b), exempts 31~

- 25 - from income ta>: earnings of employee or pension trust and its coverage is limited t:o employee trust funds. It.

is~ for this reason~ a specific or special provision. Since Sec. 2l(c)(1) and Sec. 54(b) ar·e provisions of the same Tax Code and refer to the same subject matter income t.::n:ation and e>:ception therefrom they should be read together and any repugnancy betvH::?en them is , reconc i 1 ed by construing the specific or special pr·ovision as an e>:ception to the general provision.

(Bagatsing vs.

Ramirez, 74

SCRA 306)

PD 1959 made Sec.

21(d) and Sec.

24(cc) I::JE:>neral provision by deleting the proviso therein expressed. The fact that Sec.

2l(d) or- Sec.

24(cc) in its comprehensi v e term covers the subject matter- o ·f Sec.

56(b), nov1 Sec.

'54(b), does not necessarily operate to impliedly r-epeal the latter.

For· settled is the pr-inciple in legal hermeneutics that a general law on a subject does not operate to repeal a prior special law on the same subject.

The presumption against implied r · r:~peal is stronger v1here, of two laws, one is special and the other general, and this rule appl.if:~d even though the terms of the gene1r a 1 1 av1 are broad enough to cone 1 ude the:~ matter·· covered by the s pecial lav1.

(Camacho vs. CIR, 80 F'h11. 848; Manila Railroad Co. vs. Rafferty, 40 Phil. 224) 3.

lhg _ __ J~~---· 9..r.: .~o._t:_ ,i.,Q_g __ j:§\): ____ g _>;~f.T.l_ptJ9.Q. .!:..9.

__ f:?!f.llpJ, _q_y~_f?. _____ :tr.::.L.t!?..t _____ :f__L,tflQ_~ ------IJ..R..L __ h~Y.ing__m_§'g __ ~_ ~ny _______ <:.1 :i?.t.:i..o.t:.= .. t .:i.9.n~ .. _..:t:.b~ --~IR ______ ?h.9J,I_l<::I ... J19..t _____ m.€\Kf? ~DY ..... _<::I_:i.?.t...t_.m;:.t:A9.0· Section 54 (a), formerly Sec.

56(a)~ provides that the "ta>:

imposed by this Title upon individuals shall apply to the income of estat.es or any kind of pr-operty held in tr·ust."

Section 54(b), formerly Sec.

56(b), provides the exception and states that the "ta>: imposed by this Title shall not app 1 y to employee's trust." The "ta>t imposed by this "Title" refers to income tan, and aincome tax includes final or withhoelding tan on income. The law not having made any distinction, the ta» that “shall mot apply to employee’s trust" embry aces all kinds of incame tar, including final or withholding ta».

Moreover, the law speaks of "income" and makes moa distinction as to what it embraces. Since “income” includes interests and yields from bank deposits and deposit substitutes, the income of employee trust exempt from income tax necessarily includes such interests or yields. Cansequentiy, when Sec. 84(b) provides that the "tax imposed by this Title shall not apply. to employee's trust, it exempts from. all. kinds of income tax, ineluding final. interests or yields from T-Rill placements or. deposit eubstitutes. oo For the rule 18 well settled that where the Jaw. does. not distinguish, we should not. distinguish. (Cotqate-Falmolive Fhil., Inc. VS. Gimenez, 1 SCRA 247)

4. Legislative. history of. the provisions involved shows clear intent. to preserve the tax exemption privileges of employee’ s trust oor retirement funds. ~ In or about 1967 when the pensian plan (Annex "E" of Petition) was established er on January 18, 1974 when the BIR ruled that the earnings af said pension plan are exempt fram income tax (Annex "D" of Fatitian), the law in force oan the exuhbject was and still is Sec. S&(b), now Sec. S4¢(b) of the Tax Code. There was yet no Sec. 21(d) nor Sec. 24(ec) first. time. only on tember 17,1980 by PY) ot a However, while Sec. 2i(d) or Sec. 24(cc) contains the proviso that "if the recipient of such interest is exempt fram incame taxation, mo tax shall be imposed", such proviso is mot a tax exemption provision because it does not, by aitself, qrant any tax exemption but 3h CO) be ak relies om another law that grants the tax exemption. Moreover, PD 1739 did not repeal Sec. 56(b), now Sec. 54(b), of the Tax Code.

On. October, 10, 1984.

issued withdrawing all FD AGSS was _axemption privileges previously enjoyed under special claws. except. those therein provided and. those provided in. the Tax Code... (Ministry Order No. 39-84). In other words, Sec. 56(b)s now Sec. S4( Bis employe and prese On October, 10, 1984 PD A959 was issued, expressly repealing a number of specific provisions of ithe Tax Code, by, ineluding. Secs... 21(d) deleting. the | provisos. imposing. a straight f interests and yields fr Si and deposit. substitutes _ ‘Howey r, FD 1959 did not_repeal Sec. 56(b), now Sec. S4(b), of the Tax Code. This fact Clearly indicates the intent to preserve the tax exemption privileges of employee trust funds.

Subsequently. PD 1994 was pro- miulqated codifying all tar laws and amendments into what is called the “Hational Internal Fevenue Code of 1986". PD 1994 increased the final withholding tax oan interests and yields to 17-1/27%, and it re-enacted in toto Sec. S6(b) and re-nmumnbered it o4(b). As the tax exemption under. Sec... 54(b)_ covers final recognition | as hi are not. subject. to _. _¢ interes sts from be - deposits and. yie from deposit substitutes.

Qn duly O31, 1986, Executive Order Mea. 27 was issued amending a mumber of apecific provisions of the Tax Code, inciucding Sec. 21(d) by increasing the Si ba Pe final tax toa BO”, However , Order No. 37 did not repeal or. ame Se o4(b) af the Tax Code; it did re-enact provisions supportive of oo the oo tax exemption privileges of employee trust funds. su the sis 7 retirement. 5._tinder. a& private retirement plan. exempt from income tax (Sec. 10, E.0. No. 37) and the provision making contributions of the employer to the employee trust funds deductible expense. (Sec. ii, ibid.) These circumstances could anly mean that Executive Order No. S7 intended to preserve the tax exemption privileges af employee trust funds, including their earnings from deposit substitutes or Y- Rill placements.

the. fact. that Executive Order. Bn BRS. while withdrawing tax exemptions in general, expressly pres hose tax exemptions provided the Tax Codes which ineludes Sec. 54 (6 (pp. 130-159, CTA rec.)

Petitioner asserts that, with reference ta the third (issue, assuming arguenda that FD 1959 impliedly repealed the tax exemption of retirement fund oan their earnings on deposit substitutes, PD 1994 and Executive Order Noa. 273 revived said tax exemptian. Truly, assuming that FD 1989 impliedly repealed the tax exemption privileges of employee trust or retirement funds aon their earnings from deposit substitutes such as T-Hill placement, without however ruling it ais sa, FD 1994) and Executive Order Na. 273, which are later statutes, revived such exvemptian from income tax when they reenacted Sec. S4(b) of the Tax Code. (Montelibana restores. to. the employee trust .fund its tan exemption.an its interest income and. yields. from deposit substitutes. Thus, ina case where a caoperative’s tax exemption, previously withdrawn by FD 1935, was restored by FD 2008 and the questian raised is whether such restoration of tax exemation entitles the cooperative to exemption from paying final tax on its interest income, the RIR dn its Ruling No. 148 dated. August 12, 19686 held:

"Sccordingly, since the exemption of cooperatives fram income tax, anand obthers, is restored by FD 2008 which is a law promulgated later that FD No. L9O9 (effective October 15, 1984), you are exempt from the $L7-1/2% now 20%) final tax on interest income from Philippine currency bank deposits and yield from deposit substitutes mex." (BIR Ruling No, 148, Auq. 12, 1986).

Moreaver, in paimt af location, Sec. S4(b) is later than Sec. 2i¢d) or Sec, 24(cce). When FD 1994 and Executive Order No. 275 re-enacted Sec. S4(b), formerly Sec. S6(bh), it made the latter section a law of later enactment than Sec. 21i(d) or Sec.

24(cc) because FD 1994 and Executive Order No. 273 are enacted later than FD 19389. It is a settled

- 30 - pr-·inc:::iple th.:tt wher-·e the special law is later it will be regarded as a qualification of the general law or considered grafted as an exception thereto. fLagaan vs. City o~ Hanila, 17 SCRA 579; Pacis v s. Averia .~ .18 :::CRA ·.~07; Lopez vs.

Custo a s .~

137 SCRA

.327} Applying this rule~ deemed read as an e >:cept.i.on to Sec. 21(d) or Sec. 24(c:c)~ now Sec.

2l(c:)(1)~ of theTa>: Code is Sec. 54(b), formerly Sec. 56 (b), thereof, I!Jh.ich means that the genera 1 pr-·ovis.i.on s ubjecting inter·est:.s from bank deposits and yield s from deposit substitutes does not apply to income and yields from deposit s ubstitutes of employee trust funds. Finr"\lly, petitioner- a s ser· ts that petitioner ' s cl .:dm ·for r-·efund of P3l2,633.40, representing ta>: paid on interest income from loans, cannot be dispelled by respondent Commissioner of Internal Re v e nue bec:

.:~use in hi s BIR Ruling No.

334 dated 1987, he ruled that.

income of r .. etirc mPnt ·fund from its investment consisting of interest from loans is exempt from income tax. BIR Ruling No. 334 reads in part: "This re ·fers to your 1 et ter August .1•1, 1987 requesting a ruling as to whether interest income by the retirement fund fr·om direct loan s made by it are subject to the 20% withholding tax.

- 31 - "In reply thereto~ I have the honor to in form you that income or retirement fund fr·om its investments consisting of interest from loans is exempt from income tax pursuant - to Section 56 (b) of the Tax Code, as amended.

This is i n 1 ine with Ministry Order No.

39-84 whic h states that the 1--1ithdrawal of the e>:emption by P.D.

No.

1955 does not apply to I exemptions embodied in the National Internal Revenue Codr.?.." Also~ in its claim f or refund o f P780,352.28~ representing final tax on yields from Treasury Bill placement. n ·f retirement fund petitioner cites the case of GCL F:etir·ement: Plan vs.

Commissioner of Internal Revenue, CTA Case No. 3888 promulgated on December· 1~5~ .1986~ in 1--lh.i.c:h this Court held that the interests or yields from T-Bill placements of employee retirement funds are exempt from the final tax and ordered their refund.

WHEREFORE, We find and so hold that (1) petitioner is entitled to a refund of the amount of P312,633.40 representing withholding taxes paid on interest income from direct loans and made by the retirement funds of the pension · plan being exempt ( from income tax pursuant to Sec. 65(b), now Sec. 54(b), of the Tax Code; and that (2) it is equally entitled to a refund of the amount of P780,352.28 representing final tax on yields from T-Bill

- 32 - placements of the retirement fund of the pension plan paid to the BIR in 1986 up to June 30, 1987, as well as final ta>:es paid after June 30, 1987, for being exempt pursuant to Sec. 56( b), now Sec. '54 (b)' of the Ta>: Code or the total refundable SUift of P1,092,9'58.68.

Without pronouncement as to costs.

• ROAQUIN

Judge C'RR.TIFIC'ATION I her-eby cer-tify that this decision was r-eached after due consultation between the member-s of the Cour-t of Tax Appeals in accor-dance with Section 13~ Ar-ticle VIII of the ution.

• ROAGUIN

Judge Appeals