CTA Case No. 4421 (Decision)

I Republic of the Philippines- COURT OF TAX APPEALS Quezon City CITYTRUST BANKING CORPORATION C.T.A. CASE HO. 4421 as Trustee of Various Retirement Funds, Petitioner, - versus - COftftiSSIONER OF INTERNAL REVENUE, Respondent. X- - - - This is a claim for refund of the amount of P12,798,826.39 representing withholding tax on income from its investments on bank deposits, money market placements and securities for the year 1988. It appears that petitioner Citytrust Banking Corporation is an employees trust, set up by the employer for the purpose of providing its employees retirement, disability, death and separation benefits. From January to December 1988 petitioner as trustee and investment manager deposited and reinvested the assets of the Fund in savings and time deposits as well as in fixed-income investments, including money market instruments, and in securities (including government securities, such as treasury bills with various banking 1 - - - �-���-- - � - - - - - ��----~------ ___ ) � - �-�-~-----

.)____________ . DECISION - C.T.A. CASE NO. 4421 - -2- and �inancial institutions. These banking and �inancial institutions withheld the �inal tax o� 20X provided under Section 21(cc><1> in relation to Section 50(a) all o� Title II o� the NIRC, �rom the interest income or yield derived by the Funds on various dates during the calendar year 1988. On January 8, 1990, petitioner �iled a written claim �or re�und with respondent. Without waiting �or respondent to resolve its claim �or re�und, petitioner �iled the instant petitioner �or review as a way o� tolling the two (2) year prescriptive period set by law. The sole issue to be resolved in this case is whether or not petitioner is exempt �rom withholding tax on income �rom money market placements, bank deposits and securities pursuant to Presidential Decree 1959. Petitioner alleged that the withholding and collection o� the 20X �inal tax �rom the income or yield derived by the Fund �rom bank deposits and investments are erroneous and/or illegal, the Fund being exempted by law �~om income tax. Likewise it invokes the ruling in GCL Retirement Fund vs. Commissioner of Interal Revenue, CT.A Case No. 3888, December 16, 1986, in maintaining that the issues in the case at bar are similar. Under Section 53<b> o� the NIRC, petitioner alleged that it is exempt �rom income tax being a quali�ied retirement �und. 2 J

DECISION - C.T.A. CASE NO. 4421 - -3- Respondent on the other hand alleged among other things that: 1. > Petitioner does not state a cause o� action 2. > Petitioner who claims to be entitled to income tax exemption o� the earnings o� its employees retirement �und under R.A. 4917, in relation to Sec. 56<b> (now Section 53<b> o� the National Internal Revenue Code, cannot invoke the a�oresaid section to claim exemption �rom the �inal tax imposed by Section 2l<d> and 24(cc) [now Section 21 <c><l> and 24<e><l>J o� the said Code on earnings derived �rom interest on bank deposits and/or deposit substitutes. 3. > The exemption �rom the �inal tax on interest on bank deposit substitutes which petitioner previously enjoyed was pursuant to the then proviso �ound in Sections 21<d> and 24<cc> o� the NIRC. 4. > Presidential Decree No. 1959 which took e��ect on October 15,1984 amended the a�oresaid sections by deleting the said proviso granting exemption �rom the lOX �inal tax o� interest �rom bank deposits and/or deposit substitutes to recipient therein who are expressly exempted by law �rom income taxation. 5. > Moreover, petitioner averred that because o� such amendment, the exemption granted under Sections 2l(d) and 24<cc> is now deemed to have been repealed or withdrawn. 6. > Additionally, petitioner cannot claim exemption �rom the �inal tax imposed by Section 2l<d> and 24<cc> [now Section 21<c><l> and 24<e><l>J since such exemption which is previously enjoyed had already been revoked by Presidential Decree No. 1959. 3

r ' DECISION - C.T.A. CASE NO. 4421- -4- 7. > It is alleged that petitioner has not shown that the tax sought to be re�unded was actually withheld and remitted to herein respondent in accordance with the NIRC. 8. > Petitioner who has the burden o� proving that it is entitled to tax re�und, has �ailed to establish that the tax subject o� its claim �or re�und was erroneously or illegally collected. 9. > Respondent argued that petitioner was not able to comply with the provisions o� Sections 243 and 246 <now Sections 204 and 230 o� the Tax Code. 10. > Likewise, the claim �or re�und, being in the nature o� an exemption �rom taxation, must be construed strictly against the petitioner. We �ind �or the petitioner. First o� all, it is noteworthy to state that Citytrust Banking Corporation being an employees trust has quali�ied as exempt �rom income tax by the Commissioner a� Internal Revenue in accordance with Republic Act No.4917 which was approved on 17 June 1967. The said law is herein quoted to wit: Section 1. Any provision o� the ~av to the contrary notwithstanding, the retirement bene�its received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private bene�it plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the 4

--- ...... ( DECISION - C.T.A. CASE NO. 4421 - -5- private bene�it plan or that arising �rom liability imposed in a criminal action." <Underscoring supplied> The pertinent law which exempts employees trust �rom income tax is Section 56<b><now 53[bJ> o� the Tax Code, as amended by Rep. Act. No. 1983, supra which took e��ect on June 22, 1957 and reads as �allows: �sec. 56. Imposition o� Tax. laJ App1ication of tax. The taxes imposed by this Title upon individuals shall apply to the income o� estates or of any kind of property held in trust. XXX XXX XXX lbJ Exception. The tax imposed by this Title shall not apply to employee's trust which forms part o� a pension, stock, bonus or pro�it-sharing plan o� an employer �or the bene�it o� some or all o� his employees x x x " Mainly, the rationale behind the tax exemption extended to employees trust is because o� the purpose o� its creation. Employees trust or bene�it plans are designed to provide economic assistance to employees upon the occurrence o� certain contingencies, namely old age, retirement, death, sickness or disability. It assures protection against certain risk to which members o� the Plan may be exposed. Likewise, it is an independent and additional source o� protection �or the working group, and is established �or their sole bene�it 5

DECISION - C.T.A. CASE NO. 4421 - , -6- and for no other purpose. <GCL Retirement Plan vs. Commissioner of Internal Revenue~ CTA Case No. 4130~ February 18~ 1993>. The deletion in Presidential Decree No. 1959 of the provisos dealing with tax exemption and preferential rates under the old law, therefor cannot apply or extend to employees trusts. The said decree, being a general law, cannot impliedly repeal a specific provision, Section 56<b><now 53[bJ> in relation to Republic Act No. 4917 granting exemption from income tax to employee's trusts, Republic Act No. 4917 was enacted on June 17, 1967, long before the issuance of Pres. Decree No. 1959 on October 15, 1984. 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 is so even if the provisions of the latter are sufficiently comprehensive to include what was set forth in the special act. <\'illegas vs. Subido~ G. R. No. L-31711~ 30 September 1971~ 41 SCRA 190>. Inso�ar as the final tax and the withholding thereof are contained in Title II o� the Tax Code under "Income Tax", inevitably said trust must be deemed exempt therefrom. Section 56<b> in relation to Section 56<a> supra, clearly excepts employees trust from "the taxes imposed by this Title". Moreover, it cannot be 6

I DECISION - C.T.A. CASE NO. 4421 - -7- denied that the �inal withholding tax is collected �rom income in respect o� which employees trusts are declared exempt [Sec. 56<b> now 53<b>J, Tax Code. Section 56<b>, now 53(b) o� the Tax Code, as amended by Republic Act No. 1983, exempted employee's trusts �rom income tax. <Commissioner o� Internal Revenue vs. Court o� Appeals, 207 SCRA 487> The subsequent application o� the withholding systems to interest on bank deposits or yield �rom deposit substitutes is essentially to maximize and expedite the collection o� income taxes by requiring its payment at the source. Since, Citytrust Banking Corporation is an employee's trust, it certainly enjoys a tax-exempt status �rom income. There�ore, we �ind it illogical in withholding a certain percentage o� that income which it is not obliged to pay in the �irst place. (Commissioner of Internal Revenue vs. The Honorable Court of Appeals, et.al., 6. R. No. 95022, l'Jarch 23, 1992> Petitioner was able to prove its entitlement �or the re�und by proving that the interest �rom the investments o� various retirement �unds are tax exempt as certi�ied by the Bureau o� Internal Revenue and provided �or under R.A. 4917. It was likewise established by petitioner that it �iled its claim �or re�und within two-years �rom the 7

DECISION - C.T.A. CASE NO. 4421 - -8- date o� payment o� the tax as provided �or under Section � 230 o� the NIRC �. � J.� By way o� evidence, petitioner presented various monthly remittance returns o� income tax withheld which was �iled by the Central Bank with the BIR. Various certi�icate o� �inal income tax withheld issued by the Central Bank in �avor o� petitioner was likewise presented to prove that the 20Y. �inal tax withheld by � the Central Bank �rom interest on taxable securities purchased were remitted to the BIR. From the �oregoing, petitioner was able to prove by way o� material evidences its clear entitlement to the re�und sought �or. It is a well established. principle that tax exemption is likewise to be enjoyed by the income o� the pension trust. <Commissioner of Internal Revenue vs. � Court of Tax Appeals~ 207 SCRA 487> WHEREFORE, in view o� the �oregoing, respondent Commissioner o� Internal Revenue is hereby ordered to re�und to petitioner the sum o� representing withholding SO ORDERE:D. GRUBA Judge ,. 8

DECISION - C.T.A. CASE NO. 4421- - 9- WE CONCUR: Q~ lQ.;. c:~ tt:Jw D. ACOSTA Pres:_:g ftOH 0. DE VEYRA Associate Judge / CERTIFICATION 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, Article VIII of the Constitution. ERHESTO D. ACOSTA Presiding Judge Court o� Tax Appeals