CTA Case No. 4314 (Decision)

- REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY CITYTRUST BANKING CORPORATION, C.T.A. CASE HO. 4314 AS TRUSTEE OF VARIOUS RETIREKENT FUNDS, Petitioner, - versus - COKKISSIOHER OF IHTERHAL Promulgated: REVENUE, JAN 24 1996 Respondent. X- - - - - - - - - - - - - - - - - - - -X DECISIOlff This petition for review is seeking for the ret:und of P15,191,111.11 allegedly representing erroneously and/or illegally collected final withholding taxes on income derived by petitioner, as trustee of various retirement funds, on savings and time deposits, money market placements and government securities t:or the calendar year 1987. The t:acts ot: the case are as t:ollows: Petitioner is the trustee and investment' manager ot: the following trust funds~~ FUNDS>, namely: � Citibank Retirement Fund <Exh. "A"> CityTrust Retirement & Provident Fund <Exh. "Bn> Alcatel Trade International Phils.,Inc. <Exh. "Cn> Singapore Airlines, Inc. <Exh. "D" > 83

DECISION - C.T.A. CASE NO. 4314. -2- Araneta University Foundation <Exh. "E"> Southeast Asian Fishery Dev. Center <Exh. "G"> International Flavor & Fragrances <Exh. "H"> Atlas Copco <Phils.>, Inc. <Exh. "I"> American President Lines <Exh. "J"> Rhone Poulenc Phils., Inc. <Exh. "K"> The Goodyear Tire & Rubber Co. o� the Phils., Ltd. <Exh �. "L" > Firestone Tire Rubber Co. <Exh. "M"> A. H. Robins Phils., Inc. ( Exh. "N") Mercury Group Provident Fund <Exh. "O"> Singer Sewing Machine Company <Exh. "P"> Miguel J. Osorio Pension Foundation, Inc. <Exh. "R"> North Negros Marketing Co., Inc. Philippine Packing Corporation <Exhs. "S" & "T"> C.C. Unson Co., Inc. <Exh. "U"> Nestle P~ils., Inc. <Exh. "V" > Caltex <Phils.>, Inc. <Exh. "W"> Association o� International Shipping Lines, Inc. <Exh. "X"> Dow Chemicals Paci�ic Ltd. <Exh. "Y"> Merrell Dow Pharmaceuticals <P~~ls. >, Inc. <Exh."Z"> Catholic Educational Assn. o� ~~e Phils. <Exh. "AA"> Royal Insurance <Exh. "AB"> Sime Darby Pilipinas, Inc. <Exh. "AC"> Boehringer Ingelheim <Phils. >, Inc. <Exh. "AD"> J �. Walter Thompson Company <Exh. "AE" > Cagayan Electric Power and Light Company, Inc. <Exh. "AF"> Mondragon International Phils., Inc. <Exh. "AG"> Aboitiz Group o� Companies <Exh. "AH"> P�izer, Inc. <Exh. "AI"> Paci�ic Enamel & Glass M�g. Corp. <Exh. "AJ"> Philippine National Oil Company <Exh. "AK"> Armco Marsteel Alloy Corporation <Exh. "AL"> Air Line Pilots Association o� the Philippines <Exh. "AM"> Citibank Early Retirement Plan <Exh. "AN"> Stal-Astra Re�rigeration, Inc. <Exh. "AO"> Manila Gol� & Country Club, Inc. <Exh. "AP"> Cyanamid Philippines, Inc. <Exh. "AQ") Hemisphere Leo Burn.~tt, Inc. <Exh. "AR" > BASF Phils., Inc. Admiral Realty Co.,.~nc �. <Exh. "AS"> .. European Chamber o� Commerce o� the Philippines. <Exh. "AT"> which were created pursuant to the employee retirement, provident, and profit sharing plans <PLANS> set up by the 84

DECISION - C.T.A. CASE NO. 4314. - 3- employers concerned �or the purpose o� providing retirement, separation, death and disability bene�it to their respective employees. These PLANS, according to petitioner were �ound by the Commissioner as "quali�ied" tax-exempt having been met the requirements o� a reasonable bene�it plan prescribed by R. A. No. 4917 as implemented by Rev. Regs. No. 1-68 as amended. During the year 1987, petitioner hold, manage, invest and reinvest the assets o� the FUNDS which earned income. These income, petitioner asserts, were erroneously subjected to 201. �inalfJ withholding tax by various �inancial institutions such as Far East Bank and . Trust Company, Multinational Bancorporation and CityTrust Banking Corporation in view that the PLANS were tax- exempt. Believing that it is entitled to a re�und, petitioner on November 25, 1987 �iled a written claim with the respondent requesting �or the total amount o� P15,191,111.11 representing erroneously and/or illegally collected �inal withholding taxes. On December 28, 198..8, petitioner �iled the instant petition �or review in o:o,Per. to toll the.. running o� the two-year prescriptive period allowed by law. In answer thereto, respondent avers that the petition states no cause o� action as it does not allege ...... 85

---- DECISION - C.T.A. CASE HO. 4314. -4- the date when the tax sought to be re.funded was paid ( llanu�acturer' a Bank and Trust Co. , as trustee of Gem Trust Pl.ans vs. The Co��issi.oner of Internal Revenue, C. T. A. Case Ho. 1659, Hove�ber 29, 1965>. Any amount claimed to have been withheld must be shown to have been paid and remitted to the co.ffers of the government. Presidential Decree No. 1959, which took e.f.fect on October 15, 1984, withdrew the exemption .from withholding tax on interest .from bank deposits and yield .from deposit substitute. She also contends that in an action .for the refund of taxes, the burden of proof is upon the taxpayer to show that taxes paid were erJ!neously or illegally collected, that it must comply with the provisions o.f Sections 292 and 295 of the Tax Code and that claims .for refund are construed against claimants, the same being in the nature of an exemption from taxation <Co�aissioner of Internal. Revenue vs. Ledesaa, 3 SCRA 95>. Petitioner submitted various documents in support o.f its case which consist, among others, o.f: ( 1) trust agreements between petitioner and the various retirement plans; <2> letter from the BIR confirming the tax exempt status of the PLANS; (3~ Confirmations o.f Sale issued by '.!-M-- Petitioner to its Trust and Investment Department in the latter's capacity as Trustee of the FUNDS; <4) Fixed Income Securities Placements and the inter.folio '" ' 86

DECISION - C.T.A. CASE HO. 4314. -5- computations and the adjustment notes; (5) Schedule o:f Placements for the year ended December 31, 1987 made by petitioner's Trust and Investment Department in behal:f o:f the various FUNDS; (6) Debit Tickets issued by the Government Securities Department o:f the Central Bank to petitioner recording the latter's purchase o:f Treasury Bills; and (7) Credit Advices issued by the Government Securities Department of the Central Bank to the BIR recording the remittance o:f 20Y. :final tax withheld :from interest on taxable securities. Respondent, on the other .hand,, railed to introduce controverting evidence. Both parties elept not to submit their respective memorandum. Is petitioner entitled to the re:fund o:f 20Y. :final withholding taxes in the amoun~ of P15,191,111.11 alleged to have been erroneously and/or illegally collected? We answer in a:ffirmative. The issue having been settled by the Supreme Court. A ruling was laid down by the High Court in a precedent-setting case entitled Coaaiaaioner of Internal Revenue va. Court of Appeals, 207 SCRA 487 wherein, in an en bane decision, it intei."I"igently ruled: � XXX XXX XXX 87

DECISION - C.T.A. CASE NO. 4314. -6- To begin with, it is signi.ficant to note that GCL Plan was quali.fied as exempt .from income tax by the Commissioner o.f Internal Revenue in accordance with Rep. Act. No. 4917 approved on 17 June 1967. This law specifically provided: SECTION 1. Any provision o.f law to the contrarY notwithstanding, the retirement benefits received by officials and employees o.f private firms, whether individual or corporate, in accordance with a reasonable private benefit 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 of.ficial or employee concerned to the private benefit plan or that arising ..from liability imposed in p criminal action;" x x x (emphasis ours). In so far as employees' trusts are co~cerned, the foregoing provision should be taken in relation to then Section 56< b > (now 53Cbl> of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on 22 June 1957. This provision specifically exempted employees' trusts from income tax and is repeated hereunder for emphasis: Sec. 56 Imposition of Tax. (a) Application of tax. The taxes imposed by this Title upon individuals shall apply to the income of estates or of any kind o.f property held in trust. XXX XXX (b) E~~eption. The tax imposed by this Title shall not apply to employee's trust which .forms part of a pension, stock bonus or pro.fit- sharing plan o.f an employer .for the bene.fit o.f some or all o.f his employees x x x" 88

DECISION - C.T.A. CASE NO. 4314. -7- The tax-exemption privilege o:f employees' trusts, as distinguished from any other kind of property held in trust, springs :from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts :for tax exemption. And rightly so, by virtue of the raison d 'etre behind the creation o:f employees' trusts. Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against hazards to which members of the Plan may be exposed. It is an independent and additional source o:f protection for the working group. What is more, it is established for their exclusive bene:fit and :for no other purpose. The tax advantage in ReJ.4 Act. No. 1983, Section 56Cb>, was conceived in order to encourage the formation and estabiishment o:f such private plans for the benefit o:f laborers an~. employees outside of the Social Security Act. Enlightening is a portion o:f the explanatory note to H. B. No. 6503, now R. A. 1983, reading: Considering that under Section 17 of the Social Security Act, all contributions collected and payments of sickness, unemployment, retirement, disability and death benefits made thereunder together with the income of the pension trust are exempt from any tax, assessment, fee, or charge, it is proposed that, a similar system providing for retirement, .~tc. benefits :for employees outside the Social Security Act be exempted from income taxes. " <Congressional Record, House o:f Representative, Vol. IV, Part. 2, No. 57, p. 1859, May 3, 1957: cited in Co��issioner o:f Internal. Revenue vs. Visayan El.ectric Co., et. al.., G. R. .. 89

DECISION - C.T.A. CASE NO. 4314. -8- No. L-22611, 27 Hay 1966, 23 SCRA 715>; underscoring supplied. It is evident that tax-exemption is likewise to be enj eyed by the income o:f the pension trust. Otherwise, taxation o:f those earnings would result in a diminution o:f accumulated income and reduce whatever the trust bene:ficiaries would receive out o:f the trust fund. This would run afoul o:f the very intendment o:f the law. The deletion in Pres. Decree No. 1959 o:f the provisos regarding tax exemption and pre:ferential tax rates under the old law, there:fore, cannot be deemed to extend to employees' trusts. Said Decree, being a general law, cannot repeal by implication a speci:fic provision, Section 56 (b) (now 53 [ b J ) in relation to Rep. Act No. 4917 granting exemption from income tax to employees' trusts. Rep. Act 1983, which excluded ~ployees' trusts in its Section 56 ( b > was effe{ltive on 22 June 1957 while Rep. Act No. 4917 was enacted on 17 June 1967, long before the issuance o:f Pres. Decree No. 1959 on 15 October 1984. A subsequent statute, general in character as to its terms and application, is not to be construed as repealing a special or speci:fic enactment, unless the legislative purpose to do so is mani:fested. This is so even i:f the provisions of the latter are su:f:ficiently comprehensive to include what was set :forth in the special act <Vi11egas vs. Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA 190>. Notably, too, all the tax provisions herein treated come under Title II o:f the Tax Code on "Income Tax." Section 21(d), as amended by Rep. Act No. 1959, re:fers to the final tax on individuals and :falls under Chapter II; Sectio~ 24<cc> to the :final tax on corporations under Chapter III; Section 53 on withholding of fina~tax to Returns .and Payment of Tax under Chapter VI; and Section 56 (b)� to tax on Estates and Trusts covered by Chapter VII. Section 56(b), taken in conjunction with Section 5G<a>, supra, explicitly excludes employees' trusts from "the taxes imposed by this Title." Since the final tax and the 90

DECISION - C.T.A. CASE HO. 4314. -9- withholding thereo� are embraced within the title on "Income Tax," it �ollows that said trust must be deemed exempt there�rom. Otherwise, the exception becomes meaningless. There can be no denying either that the �inal withholding tax is collected �rom income in respect o� which employees' trusts are declared exempt (Sec. 56 [ b l >, (now 53 [ b l, Tax Code). The application o� the withholding system to interest on bank deposits or yield �rom deposit substitutes is essentially to maximize and expedite the collection o� income taxes by requiring its payments at the source. I�. an employee' trust like the GCL enjoys a tax-exempt status �rom income, we see no logic in withholding a certain percentage o� that income which it is not supposed to pay in the �irst place. Petitioner also relies on Revenue Memorandum Circular 31-84, d~ted 30 October 1984, and Bureau o� Internal R~enue Ruling No. 027-e-000-00-005-85, dated 14 January 1985, as authorities �or the argument that P'res. Decree No. 1959 withdrew the exemption o� employees' tru.~ts �rom the withholding o� the �ina1 tax on interest income. Said Circular and Ruling pronounced that the deletion o� the exempting and pre�erential tax treatment provisions by Pres. Decree No. 1959 is clear mani�estation that the single 151. tax rate is imposable on all interest income regardless o� the tax status or character o� the recipient thereo�. But since we herein rule that Pres. Decree No. 1959 did not have the e��ect o� revoking the tax exemption enjoyed by � employees' trusts, .reliance on those authorities is now misplaced. XXX XXX XXX It cannot be denied that based on the above authority, petitioner is�~ntitled to the.. re�und sought. Nevertheless, it is essential that the retirement plan should ~e quali�ied as exempt �rom income tax by the BIR in accordance� with R. A. No. 4917 as implemented by Rev. . �~ 91

DECISION - C.T.A. CASE NO. 4314. - 10 - Regs. No. 1-68. It is on this premise that the exemption from the final withholding tax of the income from investment in treasury bills of the retirement fund is anchored ( Bank of the Phi.l.ippi.ne Isl.ands as Trustee o:f the E�pl.oyees' Reti.re�ent Fund o:f IBn Phi.l.i.ppines, Inc., et al.. vs. Co��i.ssi.oner o:f Internal. Revenue, CTA Case Nos. 4533 to 4566 & 4681 to 4685, Jul.y 1, 1994). A perusal of the evidence on hand revealed, however, that Singapore Airlines, Inc., North Negros Mktg. Co., Inc., Caltex Phil.s., Inc., Phil. National Oil Company, Citibank Early Retirement Plan, Phils., Inc., and Admiral Realty Co., Inc. have no BIR certifications on file while the certifications of Phil. Packing Corp., Dow Chemical Pacific Ltd., J. Walter Thompson Co., Cyanamid Phils., Inc., and Hemisphere Leo Burnett, Inc. were issued in the year 1988 or 1989 whereas the refund sought covers the year 1987. This Court also noted that Mondragon International Phils., Inc., Armco Marsteel Alloy Corporation, and Stal Astra Refrigeration, Inc. purported certifications of tax-exemption are not valid. The said letters merely.. informs the preceding companies that their application ':5br qualification. under RA 4917 are still pending with the Government and Tax Exempt Corporation Division. Therefore, the refund of the final withholding taxes of these FUNDS cannot be granted. 92

r DECISION - C.T.A. CASE NO. 4314. - 11 - As to the substantiation of the amounts claimed, we took note of certain discrepancies. The total :final tax withheld in some o:f the FUNDS were less than the amount claimed while in others the opposite were true. In both instances, only the amount claimed as refund which are supported and tally with the evidence submitted can be allowed. To wit: bount Refundable Aat.. Allowable Clailled Per Evidence Exh. Refund Citibank Retireaent Fund Pl,769,599.62 Pl,G70,869.16 GGL Pl,G70,869.16 CityTrust Retire~ent & Provident Fund 234,Z79.38 234,848.43 GGil 234,Z19.38 Alcatel Trade International Pbils., Inc. 44,076.74 44,076.74 liGI 44,076.74 Araneta University Foundation 203.74 106.66 GGP 106.66 Southeast Asian Fishery Develop~~ent Center 230,804.10 208,950.29 GGQ 208,804.10 International Flavor &Fragrances 15,057.18 15,057.18 GGR 15,057.18 AUas Copco (Phils. >, Inc. 87,741.11 87,741.97 GGS 87,741.97 Aaerican President Lines 81,150.36 81,150.36 GGT 81,150.36 Rhone Poulenc Phils., Inc. 40,391.26 40,391.26 GGU 40,391.26 Tbe Goodyear Tire & Rubber Co. of the Phils., Ltd. 162,366.18 162,371.43 GGV 162,366.18 Firestone Tiie' Rubber Co. 480,515.13 423,615.61 GGV 423,615.61 A.H. Robins Phils., Inc. 80,617.39 74,685.44 GGX 74,685.44 Jlercury Group Provident Fund 378,644.59 378,644.59 GGY 378,644.59 Singer Sewing Bacbine Coapany 201,185.19 201,185.19 GGZ 201,185.19 Singer Sewing Bacbine Coapany 54,313.01 54,323.19 HHA 54,313.01 Biguel J. Osorio Pension Foundation, Inc. 1,254,065.89 835,991.16 HHB 835,991.16 C. C. Unson Co. , Inc. 15,906.52 15,906.52 HHG 15,906.52 lestle Phils., Inc. 676,741.23 676,743.55 HHH 676,741.23 Association of International Shipping Lines, Inc. 12,121.63 12,121.63 HHJ 12,121.63 Berrell Dow Phanaceuticals (Phils.}, Inc. 54,507.68 54,367.49 HHL 54,367.49 Catholic Educational Assn. of the Phils. 323,242.39 323,242.39 HHB 323,242.39 Royal Insurance 18,864.55 18,864.55 HHH 18,864.55 Siae Darby Pilipinas, Inc. 86,371.13 86,371.26 HHO 86,371.13 Boehringer Ingelheia (Phils.l, Inc. 168,382.78 168,382.78 HHP 168,382.78 Cagayan Electric Power and Light Coapany, Inc. 41,650.56 41,650.68 HHR 41,650.56 Aboitiz Group of Coapanies 1,014,926.33 1,014,926.33 HHT 1,014,926.33 Pfizer, Inc. ~~~ 136,474.91 136,903.07 HHU 136,474.91 Pacific Enaael &GlaBB llfg. Corp. 26,156.23 26;156.23 HHV 26,156.23 Air Line Pilots Association of the Philippines 234,303.28 234,310.10 HHY 234,303.28 lanila Golf &Country Club, Inc. 1,580.81 1,582.57 liB 1,580.81 Banila Golf &Country Club, Inc. 2,193.22 2,196.02 IIC 2,193.22 European Chaaber of Coaaerce of the Philippines 477.92 4n.92 IIH 477.92 T 0 TAL P71 9281912.90 ~128, 211.75 ~ 3271 038. 97 93

DECISION - C.T.A. CASE HO. 4314. - 12 - This Court in its appreciation o� petitioner's evidence found out that the numerous exhibits presented by the petitioner are sufficient to warrant its entitlement for the . refund. The burden o� proo� was overturned by the petitioner. WHEREFORE, in view of all the �oregoing, respondent is hereby ordered to refund in �avor o� petitioner CityTrust Banking Corporation, as Trustee o� Various Retirement Funds, the amount o� ?7,327,038.97 as determined above to be refunded to each o� the quali�ied retirement plan. SO ORDERED. GRUBA Judge WE CONCUR: ~'- D. ACOSTA . ~-pc:t__/a/f)~.�', RAKOH 0. DEVEY ~,~ Associate Judg 94

DECISION - C.T.A. CASE HO. 4314. - 13 - CE RT I F I C AT I 0 H I hereby certify that the decision was reached after due consultat ion among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. O~H_E_S:TOz:D.-AQC.OSQTA~ Presiding Judge Court of Tax Appeals 95 ----------------------~~----..1