Republic of the Philippines Court of Tax Appeals Buezon City La Suerte Cigar & Cigarette Factory Employees Retirement Plan, et al. vs. > Commissioner of Internal Revenue, et al.

DECISION -

-@- (please see Exhibits A, & 6B, pp. 73-81, CTA records).

On May 17, 1984, petitioner and Citicorp Investment FPhilippines (CITICORE) for short entered into an investment management agreement whereby CITTICORE was appointed the investment eanaaer of the fund (Exh. D to D-6, pp. 85-89, CTA records).

In 1987 petitioner granted loans to La Suerte Cigar & Cigarette Factory and earned from the same interest income from which a final tax of 2O% was withheld pursuant to Section #1¢c) (1) in relation to Sec. Sica) of the Tax Code. The investment, interest income and the income tax withheld are as follows: (Exhibits E to E-3, F to F-3, pp. 66-67,, CTA records)

Amount of Due Interest Withholding Tax Collected

Prowissory Note _Date _ Income Date Amount *

P 4,455,000. 00 02-16-87 P76, 106.25 = 02-16-87)— P «15, 221.25 32, 157, 000. 00 02-20-87 549,348.75 02-20-87 109, 867. 75 4, 455, 000. 00 04-20-87 70,166.25 04-20-87 14, 033.25 32, 157, 000. 00 04-21-87 482,355.00 04-21-87 96, 471.00 4, 000, 000. 00 06-19-87 60,000.00 06-19-87 12, 000. 00 32, 157,000. 00 06-20-87 482,355.00 06-20-87 96, 471.00 4, 000, 000. 00 08-18-87 70,000.00 08-18-87 14, 000. 00 32, 157, 000. 00 08-19-87 562, 747,50 08-19-87 112, 549.50 4, 000, 000. 00 10-18-87 70, 000. 00 10-18-87 14, 000. 00 32, 157, 000. 00 10-19-87 562, 747.50 10-19-87 112,549.50 4, 000, 000. 00 12-07-87 77,333.33 12-07-87 15, 466. 67 32, 157, 000. 00 12-17-87) __ 643,140.00 = 12-17-87 128, 628. 00 TOTAL P3, 706, 299, 58 P741, 257.92 Fetitioner filed a written claim for refund with respondent Commissioner of Internal Revenue on

DECISION -

c.7.A. CASE NO. 4338 - 3-= February is, 1989 in the total amount of P741,259.92 (Annex "A", Petition for Review, p. 12, CTA records).

Without waiting for respondent to act an the claim for refund petitioner filed the instant petition for review on February 15, 1989, to prevent the running of prescriptive period set forth in Section 243 of the Tax Code, The only issre to he resolved is whether or not petitioner is exempt from withholding tax on income from Joan investment pursuant to Republic Aet 4917 as implemented by Revenue Regulation 1-68 as amended.

The case at bar has been submitted for’ decision based on the pleadings and records of the ease sans the memorandum of both parties.

Respondent maintains that the exemption from the final tax on interest on bank deposits and deposits substitute enjoyed by petitioner by Wibut of the provision of Section Zid) and 24 (ce) of the Tax Code has been amended by Presidential Decree No. 1959, which took effect on October 15, 1984 and has for its effect the deletion or withdrawal of the exemption from tax enjoyed by petitioner under the above mentioned Section of the National a > raw) a Internal Revenue Code. On the other hand, nebitioner claimed that the income or yield derived from the fund collected from the lnan investment are exempt from the 20% final tax: citing Section 1 of Republic Act No. 4917 which took effect aon June 17, 1967, the pertinent part af which reads:

"SECTION 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or carporate, in accordance with a "reasonable private benefit plan" maintained by the employer shall he liable to attachment, garnishment, levy or seizure by or under any legal or “equitable process whatsoever xxx. (Emphasis supplied) in relation to Section S4(b) Enow Section S3(b)] oF the NIRC which provide as follows "Spotion 53. - Imposition of Tax. -

(a) Application of tax. - The tax imposed hy this Title upon individuals shall apply toa the income of estates or of any kinc of property held in trust, including —

xxx xx XXX

(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 xxx," To further support its claim for exemption from the 20% final tax, petitioner cited the letter of 340 respondent dated June 28, 1985 stating that the income of the fund from investments is exempt from income tax within the contemplation of Republic Act No. 4917 (Exhibit 6, p. 81, CTA records).

The question involved in this case is not of first impression.

In the very recent case af Commissioner of Internal Revenue v. The Hon. Court of Appeals, the Court. of Tax Appeals, GCL Retirement Plan, represented by its Trustee-Director (£07 SCRA 487, GR. 95082, promulgated March €3, 199%) the Supreme Court decided en banc, thats “In so far as employees’ trusts are concerned, the foregoing provision should be taken in relation to then Section “=6(b) (now S3Cb]) of the Tax Code, as amended hy Rep. Act No. 1983, SUPA, which took effect on Fe June 1957. This provision. specifically exempted employees’? trusts from income tax and is repeated hereunder for emphasis" ‘Sec. S6. Imposition of Tax. -

(a) Application af tax. ~- The taxes imposed by this Title upon individuals shall apply ta the income of estates or of any kind of property held in trust.

.

aK KK xXM *(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’af his employees xxx.’

"The tax-exemption privilene of employees’ trusts, as distinguished from 34 - 6-~ any other kinc of property held in trust, enrings from the foregoing provision. Lt is unamhiquons. Manifest therefrom is that the tax law has sinnied uct employees’ trusts for tax exemption.

"And rinhtly, so. by virtue of the raison. cd'ietre behind the creation of employees’ trusts. Employees’? trusts or heanefit plans normally provide economic assistance to employees upon the Necuprence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Flan 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 na other purpose.

"xe xxx XXX o "Tt 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 oa diminution af accumulated income anc reduce whatever the trust beneficiaries would receive out of the trust fund.

This wolel Wy afoul of the very intendment of the law."

IN VIEW OF THE FOREGOING, respondent Commissioner of Internal Revenue is hereby ordered to refund to petitioner the sum of PF741,259.92 representing the 20% final tax withheld.

Runes 2 Grrnk

ERNESTO D. COSTA

Presiding Judne

d4u

-7- /

WE CONCUR:

l~'~7,~~ RAMON 0. DE VEY Associate .Judge

CERTJ:FJ:CATJ:ON

I

hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, nrticle VIII of the Constitution.

34G

~~Q.. Q......,Jf..

ERNESTO D. ACOSTA Pt~ esiding Judge

Court of Tax Appeals