CTA Case No. 5450

DECISION

This is a petition for review filed by petitioner, BANK OF THE PHILIPPINE ISLANDS <BPI) , successot~- in- interest of Citytrust Banking Corporation <Citytt~ust), trustee of the various employee retirement funds, against respondent COMMISSIONER OF INTERNAL REVENUE, for the latter's inaction on petitioner's claim for refund in the amount of P7,066,426.32, allegedly representing the 20~ final withholding tax erroneously withheld from the i nt et~est income of the Retirement Funds for the year

1. 9'35. Petitioner is a banking corporation duly organized and existing under Philippine laws and is authorized to perform trust functions and other activities by the Bangko Sentral ng Pilipinas <BSP).

It is the surviving cot~pot~at ion in a met~get~ between BPI and Citytt~ust, who was the duly appointed trustee and investment manager of

2 various retirement funds ("Funds") and pt~ovident plans ("Plans") subject of this case, on Octo bet~ 4, 1995.

Thus, petitioner~ BPI succeeds to all the rights and obligations of Citytt~ust, including those pertaining to the trust accounts involved in the instant case, in accordance with Section 80(5) of the Corporation Code of the Phi 1 i p pines, to wit : "Sec.

80.

Errect s o t= lllet'get' or consolidati o n.

The met~get~ m~ consolidation, as provided in the preceding sections, shall have the following effects:"

X X X

X X X

X X X

"5.

The Stwviving m~ consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporation in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations;

and any claim.

action or proceeding pending by or against any such constituent corporations may be prosecuted by or against the surviving or consolidated cot~pot~ation, as the case may be.

Neither~ the rights of creditors nor any lien upon the property of any of each constituent corporations shall be impaired by such merger or~ consolidation."

(Under~scor~ing supplied) Dur~ing the year~ 1995, as trustee and investment manager~ of the various retirement plans, .in f't··a, invested funds in gover~nment securities and similar investments, from which the funds realized an aggregate interest income of P34,482,517.77.

The said income was subjected by the BSP to the 20~ final withholding taxes under~ Section ;.=::1

(c) (1) in r·elation to

- 3 Section 50(a) of the Tax Code; allegedly in the tota l amount of P7,066,426.32. On Septembe~~ 18, 1996, Cit yt ~~us t, filed with respondent a claim for refund or tax credit of the aforesaid amount of P7,066,426.32, on the ground that the withholding and collection of the 20% final tax from the income of the retirement funds was erroneous and/or illegal as the Funds are exempt from income tax pursuant to Republic Act No. 4917 i n relation to Section 53(b) of the Tax Code and Supreme Court decision in the case of Commissioner of Internal Revenue vs.

Court of Appeals, The Court of Tax Appeals, GCL Retirement Plan, 207 SCRA 487, March 23, 1992, which upheld the exemption from income tax of income derived by qualified <tax exempt) retirement funds from bank deposits, money placements or purchase of bills and/o~~ government securities.

The claim for refund in the amount of P7,066,426.32 is broken down as follows: T/A No.

Account Na1e Inco1e Withholding Tax 18-004 Ateneo Eagle Fund p 44,952.04 p 8,994.57 18-005 Ateneo Scholarship Fund 131,499.88 25,778.95 18-007 Ateneo University Fund 216,909.24 47,943.90 18-017 Misoco1 23,221.31 4, 789.51 5C-001 Citibank Retire1ent Fund 132,273.60 26,690.91 SC-0018 Citibank Retire1ent Fund 385,970.85 80,107.06 5C-002 Citytrust Retire1ent and Provident Fund 386,459.59 78,116.77 SC-003 Alcatel Trade Int'l. Phils. 24,793.16 4,971.64 5C-004 Singapore Airlines Ltd. 577,826.06 115,671.85 SC-007 Int'l. Flavors & Fragrances 518.95 103.79 5C-008 Atlas Copco (Phils., Inc. l/

5C-Q11 5C-013 5C-015 5C-017 5C-Q18A 5C-018B 5C-019A 5C-019B 5C-Q20 5C-021B 5C-025 5C-028 5C-029 5C-030 - 4 - Pneuaatic A1erican President Lines The Goodyear Tire & Rubber Co. Philtread Tire & Rubber Co. Mercury Drug Corporation Singer Sewing Machine Co. Singer Sewing Machine Co. MJO North Negros Marketing Del Monte Phils., Inc. Del Monte Phils., Inc. Nestle Phils., Inc.

Caltex Phils., Inc.

Assoc. of Int'l. Shipping Lines Dow Che1icals Pacific Ltd. 5C-032 Catholic Educational 5C-033 5C-Q35 5C-036 5C-037 5C-Q38 5C-041 5C-042 5C-043 5C-043A 5C-Q43F 5C-044 5C-Q50 5C-051A 5C-051B 5C-Q52 5C-053 5C-054 5C-060 5C-061 5C-062 5C-066 5C-068 5C-069 5C-070 5C-072 5C-073 5C-073C 5C-Q73D 5C-074 5C-075 5C-076 5C-Q81 Association of the Phils. Royal Insurance Int'l. Ltd. Si1e Darby Int'l. Tire Co., Inc. Boehringer Ingelhei1 J. Walter Tho1pson Co. Cagayan Electric Power & Light Co., Inc. <CEPALCOl Pfizer, Inc.

Pacific Enaael & Glass Mfg. Corp. Petron Corporation PNOC Energy Dev't. Corp. Phil. Nat'l. Oil Co. Shipping & Transport Corp.

SST Philippines, Inc. <Arico Marsteell Abb Stal Refrige, Inc. Manila Golf - Caddy Welfare Manila Golf & Country Club, Inc. Death or Per1anent Cyana1id He1isphere Leo Burnett, Inc. BASF Ad1iral Realty Co., Inc. INTEL Phi 1 s.

ECCP MIT Retire1ent Fund, Inc. Henkel Phils.

Coca-Cola A1kor/Ana1 Pilipinas, Inc. Sharp, Phils.

Colgate Pal1olive Phils., Inc. Colgate Pallo live Phils., Inc. Colgate Paholive Phils., Inc. FOSECO Phils., Inc.

Malaysian Airlines Victory Liner Ault and Wiborg 17,942.65 58,213.17 190,712.68 24,646.39 115,232.30 147,574.01 36,090.29 0.00 0.00 438,629.44 179,568.74 1,436,208.97 272,997.19 10,709.28 55,015.28 236,749.40 14,445.26 41,408.01 103,797.31 54,269.39 78,275.44 87,860.37 32,660.72 7,151,046.66 1, 754,531.44 16,767,742.73 29,123.69 21,913.12 7,121.19 1,674.02 62,023.43 55,585.31 40,934.42 17,838.03 312,095.01 8,383.91 50,588.78 10,136.24 156,850.78 303,590.42 88,655.63 93,833.38 60,150.65 2,245.11 236,949.04 18,091.60 37,493.20 184,828.18 3,597.29 11,847.48 38,142.54 4,929.28 23,474.90 29,608.56 7,243.44 0.00 0.00 89,621.40 35,913.72 35,913.72 54,639.86 2,194. 70 11,003.32 48,675.53 2,951.06 8,283.84 20,764.23 10,926.46 16,172.40 17,818.65 6,568.69 1,630, 772.71 363,249.07 3,285, 701.15 5,826.65 4,422.06 1,440.40 334.82 12,404.69 11,122.06 8,249.53 3,637.53 63,934.07 1,677.66 10,254.11 2, 091.15 34,414.01 63,895.60 17,986.64 18,158.22 12,119.35 442.41 47,412.82 3,658.59 7,570.20 37,273.49

SC-082 5C-Q83 SC-085 5C-Q86 5C-089 SC-091 5C-092 SC-093 5C-094 SC-095 5C-O% SC-097 5C-098 SC-100 5C-100B 5C-100B 5C-102 5C-103 5C-106 SC-108 5C-110 5C-111 5C-111C 5C-114A 5C-114B 5C-114C SC-115 5C-116 SC-117 5C-118 SC-121 SC-122 SC-124 5C-125 SC-127 5C-129 SC-130 5C-135 SC-137 5C-138 5C-142 5C-142B 5C-143 5C-147 SC-148 5C-149 SC-150 5C-151 SC-155 5C-156 SC-157 Wellco1e Phils., Inc. Japan Airlines - 5 - Poblador, Azada & Associates Retire1ent Plan Phil. Belt Mfg. Corp. United Airlines Phils. Ret. Plan Blue Bell Co11odities Drug Makers Laboratory, Inc. BP South East Asia Ltd. Asian Finance IC Ret. Plan British Airways Ret. Plan US E1bassy FSN E1ployees Ret. Plan Vitacolor Industrial Ret. Plan Phil. Bus. for Social Progress ASEC Int'l. Inc.

ASEC Info Syste1 ASEC Info Syste1 E1irates Zilog Urdaneta Villa Ass. Ret. Ateneo de Davao Cyana1id Agricultural Research Foundation, Inc.

Xavier University Xavier University Wyatt Co.

Wyatt Co.

Wyatt Co.

The Senan Club Mfrs. Life Insurance Corp. Reftractories Corp. of the Phils. Bristol-Myers Squibb (Phils. l, Inc.

AT & T

Sacred Heart School C.C. Unson Co., Inc. Ret. Plan Golay Buche! Phils., Inc. IATA Agency Services Sunlife of Canada Yasaki-Torres Mfg.

Akerlund Food Industries University Physicians Services Transfar• Auto Sales Transfar1 and Co., Inc. Ateneo de Naga Phil. Waterworks Corp. Co1puter Prof., Inc.

Prov. Fortune Ins. Corp. INS Bank Philex Retire1ent Trust Philex Retire1ent Trust FMC Marine Colloids H.B. Fuller (Phils.l Inc. 35,269.60 12,666.56 30,153.22 35,362.96 5,824.40 3, 716.62 1,802.88 3,662.32 12,959.71 7,949.10 204,036.99 2,384.46 47,447.51 4,950.08 2,431.16 2, 431.16 4,829.16 10,104.80 3,347.18 28,615.23 35,801.51 56,293.43 0.00 10,380.81 29,058.07 12,132.14 1,122.14 17,158.46 73,476.59 71,317.63 6,631.89 14,823.68 17,949.44 12,923.78 10,426.02 181,413.11 15,900.14 37,476.98 17,712.05 12,128.08 2,331.19 756.62 36,680.94 7, 731.45 4,011.62 8, 766.92 8,301.50 31,470.83 31,470.83 19,688.88 0.00 7,344.44 2,533.32 6,043.94 7,108. 84 1,164.88 747.11 362.35 732.46 2,605.30 1,624.48 40,935.21 476.88 9,568.73 1,027.31 486.46 486.46 %7.51 2,030.64 691.23 5,742.91 7,160.30 11,346.24 0.00 2,076.16 5,811.62 2,426.42 234.41 3,440.84 14,920.32 14,263.52 1,352. 06 2,970.11 3,593.27 2,587. 79 2,143.61 36,394.67 3,252.08 7,525.23 3,578.33 2,425.61 466.23 151.32 7,344.50 1,550.31 802.31 1, 753.36 1,060.30 6,294.17 6,294.17 3,945.59 0.00

DECISION -

C. T. A.

CASE NO.

5'+50 - 5 - SC-161 Eveready Battery Co.

153,597.47 30,747.37 5C-162 Eastern Teleco1s 48,948.94 9,890.83 SC-164 Raton Magsaysay 11,062.82 2,569.21 5C-165 The Asia Foundation 3, 722.89 788.15 5C-175A Claret School 0.00 0.00 5C-175B Claret School 0.00 0.00 TOTAL ?13414821517. 77 ?1710661426.32 The aforesaid claim for refund was not acted upon by respondent, hence, on Decem bet~ 23, 1995, petition et~, as successor-in-interest of Citytrust, filed with this Court the instant petition for review. Petitioner repleads its stance a quo in the instant petition and further pointed out that since each of the aforementioned trusts created by the retirement plans is registered with the BIR as a reasonable private benefit plan pm~suant to Section 28(b) (7) <A> of the 1995 Tax Code, as amended by Republic Act No. 4917, they clearly enjoy exemption from income tax, including the 20~ final withholding tax aforecited, thus, petitioner stressed that it is entitled to the refund of the 20~ final withholding tax erroneously deducted and withheld from the income of the above-mentioned retirement plans in the total amount of P/,066,426.32. On the othet~ hand, t~e spondent in his answet~ intel·~po~;ed, .intt:?r~ a.l.ia, that (1) the petition states no cause of action as it does not allege the date(s) when the tax sought to be refunded were actually paid, <2> Presidential Decree No. 1959 which took effect on October 15, 1984 withdrew the exemption from withholding taxes on

··- 7 - interest income from bank deposits and yield from deposit substitutes and money market placements, and

(3) it is incumbent upon petitioner to show that it is entitled to the refund demanded under Section 230 of the Tax Code. The issue to be resolved by the Court is whether or not the interest income of the retirement funds, are exempt from withholding taxes, thus, petitione~~ as trustee of the various retirement funds abovementioned is entitled to the refund of the amount representing the 20% final withholding tax erroneously withheld and collected by respondent from the income earned by the funds ft~om its investments in government securities and s i milar undertakings. This is not the first time that we have been confronted with such an issue at hand.

stated by petitioner, the matter was already settled by the Supreme Court in the case of Comm i ss i oner of Int ernal Reven ue vs. The Honorable Cour t of Appea l s , et a l ., G.R.

No. 950 22, March 2 3 , 1992.

The Highest Court ruled in that case that an employees' maintained by an employer to provide retirement, pension, disability and death benefits to its employees and which has been approved and qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with RA No. -4·917, is exempt ft~om income tax, including the 20% final withholding tax imposed on intet~est eat~ned on

-- 8 - Philippine currency bank deposits and yield from deposit substitutes, thus:

"The~~e can be no denying eithe~~ that the final withholding tax is collected from income in respect of which employees' trusts are decla~~ed exempt <Sec. 56[bJ, now 53[bJ, Tax Code).

The application of the withholding system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source.

If an employees' trust like the GCL enjoys a tax-exempt status from incom e , we see no logic in withholdin g a certain perc entag e of that income which it is not supposed to pay in the fi~··st place."

<Unde~~sco~~ing supplied). in accordance with the above ruling of the Honorable Supreme Court which is in conformity with the provisions of

RA 4917

<Section 1) and Section 53(b) of the Tax Code, quoted hereunder, this Court finds that the withholding of the 20% final withholding tax from the income of the Funds was without legal basis, and hence, was illegally and/or erroneously collected. "SECTION 1.

Any pl·~ovision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or corporate, in acco1·~dance with a ~~~~easonable pt~ivate benefit plan" maintained by the employe~~ shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizures by or under any legal or equitable p~~ocess what soeve~~ x >< x. "

<Emphasis supplied) "Section 53.

Imposition oF tax.

(a) ~pplicatian oF tax.

The tax imposed by this Title upon individuals shall apply to income of

- 9 - estates or of any kind of property held in tt~ust, including - X X X (b) Exception The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profitable sharing plan of an employer for the benefit o·f some m~ all of his employees x x x" (Underscoring supplied) The legal issue having been settled, what r~emains to be resolved by the Court as of the moment involves factual matters, that is whether or not petitioner has established by evidence its claim for refund. In substantiating its claimed refundable amount, petition et~ formally offered exhibits A to G-329, inclusive of submarkings, and the testimonies of its witnesses.

Respondent did not object to the admission of petit i onet~' s exhibits neither~ did he submit any documentary evidence to suppor·t his case.

Thus, cons idet~i ng the unc ont t~o v er~t ed evidence of the petitioner, the Court was persuaded to extend the relief sought by the petitioner but only to the amount of P5,559,574.35, as the Court after a minutiose scrutiny of the evidence presented including those which the Court took judicial not ice of, finds that some of the retirement funds (enumerated below) were not specifically qualified and certified as tax exempt by the BIR and one of them failed to offer proof of withholding tax

- 10 - payments.

Acc(:wd i ng 1 y, the Court excluded the following from the computation of the allowable refund, thus: a) Those with retirement plans which have not been specifically qualified and certified as tax-exempt by the BIR in accordance with RA 4917. 18-004 18-005 18-007 1B-Q17 5C--o94 5C-102 5C-111 5C-114A 5C-1148 5C-114C 5C-115 5C-116 5C-117 5C-118 5C-121 5C-137 5C-138 5C-142 5C-142B 5C-143 5C-150 5C-164 5C-165 5C-170 Account Nate Ateneo Eagle Fund Ateneo Scholarship Fund Ateneo University Fund Misocot Asian Finance IC Ret. Plan Etirates Xavier University Wyatt Co.

Wyatt Co.

Wyatt Co.

The Gertan Club Mfrs. Life Insurance Corp. Reftractories Corp. of the Phils. Bristol-Myers Squibb (Phils. l, Inc.

AT & T

Food Industries University Physicians Services Transfart Auto Sales Transfarm and Co., Inc. Ateneo de Naga ING Bank Raton Magsaysay The Asia Foundation Ciba Geigy Phils.

p 44,952.04 131,499.88 216,909.24 23,221.31 12,959.71 4,829.16 56,293.43 10,380.81 29,058.07 12, 132.14 1, 122.14 17,158.46 73,476.59 71,317.63 6,631.89 17,712.05 12,128.08 2,331.19 756.62 36,680.94 8,301.50 11,062.82 3, 722.89 11,588.91 Withholding Tax p 8,994.57 25,778.95 47,943.90 4, 789.51 2,605.30 967.51 11,346.24 2,076.16 5,811.62 2,426.42 234.41 3,440.84 14,920.32 14,263.52 1,352.06 3,578.33 2,425.61 46f..23 151.32 7,344.50 1,0t.0.30 2,569.21 788.15 2,363.47 b) Those with retirement plans which were previously disqualified in CTA cases 4807 and 5083 involving the same petitioner and same legal issues:

T/A No.

Account Nate Incote Withholding Tax 5C-044 Artco Marsteel p 29,123.69 p 5,826.65 5C-050 Abb Stal Refrige, Inc. 21,913.12 4,422.06 5C-089 United Airlines 5,824.40 1, 164.88 5C-098 Phil. Bus. for Social Progress 47,447.51 9,568. 73 5C-108 Ateneo de Davao 28,615.23 5, 742.91

- 11 - c) Retirement fund which did not offer proof of withholding tax payments. T/A No.

Account Na1e Inco1e Withholding Tax 5C-151 Philex Retire1ent Trust p 31,470.83 p 6,294.17 With respect to the remaining retirement funds of other companies which were not excluded, a close scrutiny of the evidence presented by petitioner reveals that not all of the withholding tax payments mentioned in the summary were properly substantiated by source documents such as Confirmation of Sale and Fixed Income Securities Placements.

In conclusion, only the amount of P5,559,574.35 should be granted to petitioner.

WHEREFORE, the instant petition for review is partially GRANTED.

Respondent is hereby ordered to refund or issue a tax credit certificate to petitioner, as trustee of the various retirement funds, the sum of P5,559,574.35, representing the 20% final withholding tax proven to be erroneously withheld from the interest income of said retirement funds for the year 1995.

No costs.

WE CONCUR:

P esiding Judge ~ '--~ RAMON 0. DE V RA Associate J1 ge I I CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution.

L a_v~ ERNESTO D. ACOSTA Pr~esiding Judge