October 4, 1988

BIR RULING NO. 481-88

53 (b) 4-86 481-88

Gentlemen :

This refers to your letter dated May 10, 1988 requesting in behalf of your client,
Franklin Baker Company of the Philippines Retirement Plan, a ruling con rming your
opinion to the effect that distribution by the fund trustee to its member-employees of: cdt

"1. amounts representing contributions made by such employees to the

fund do not constitute income to the recipient employees and therefore such are
not subject to income tax nor to withholding tax;

"2. amounts representing earnings to the above:

"i. already subjected to income tax to the fund are no longer
subject to income tax to the recipient employees/beneficiaries;
"ii. not subjected to income tax to the fund are subject to
income tax to the recipient employees/bene ciaries under Sec.
21(a) of the NIRC and consequently subject to the creditable
expanded withholding tax of 15% imposed under Sec. 1(f) of
Revenue Regulations No. 6-85."

It is represented that the aforementioned Retirement Plan is registered under

R.A. No. 4917 as implemented by Revenue Regulations No. 1-68, as amended; that
subsequent to its registration an amendment to the plan making members'
contributions optional instead of compulsory was approved by this O ce effective on
November 2, 1982; that in a resolution passed by the Board of Trustees in January
1988, the plan was further amended making distribution of contributions made by the
employee allowable even prior to retirement of separation; and that pursuant to the
said resolution, the trustees started the distribution in February 1988 and withheld 20%
tax on the amounts distributed, which was objected to by the employees.
In reply, please be informed that any and all amounts which represent a return of
personal contributions to the employee-members shall not be subject to tax. (BIR
Ruling No. 04-86) Consequently, your opinion to the effect that amounts representing
contributions made by the employees to the fund which are being distributed to them
are mere return of capital and, therefore, not subject to income tax is hereby con rmed.
Under Section 36 of the Income Tax Regulation, income in the broad sense, means all
wealth which flows into the taxpayer other than as a mere return of capital. cdti

However, your contention that the income or earnings of the employee-members'

personal contributions are no longer taxable to the recipient employee-members since
the same were already subjected to income tax to the fund cannot be sustained by this
O ce. This is so because Franklin Baker Company of the Philippines (Franklin Baker for
short) Retirement Plan is not an ordinary trust or ordinary employees' trust for that
matter. It is an employees trust and deferred compensation plan which has been
adjudicated by this O ce on September 16, 1974 as a reasonable private retirement
bene t plan within the contemplation of Republic Act No. 4917 / now Section 28(b)(7)
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 (A) of the Tax Code / as ampli ed by Revenue Regulations No. 1-68 and 1-83 ; hence,
entitled to the following benefits and privileges, viz:
1. The retirement bene ts to be received by the member-employees shall be
exempt from all taxes [Sec. 28(b)(7)(A), Tax Code];
2. The income of the Trust Fund from its investments are exempt from
income tax [Sec. 53(b), Tax Code]. However, in view of the
amendment of Section 21(c)(1) in relation to Section 50(a) of the Tax
Code by Executive Order No. 37 which took effect on August 1, 1986,
the Franklin Baker employees' Retirement Plan is subject to the 20%
nal tax on interest and/or yield on deposit substitute instruments;
and interest on its savings and time deposits paid or accrued
beginning August 1, 1986; and
3. The contributions of the company to the retirement fund are deductible
from its gross income [Sec. 29(a)(1)(A), Tax Code].
It is to be noted that in a retirement plan under Republic Act No. 4917 [now
Section 28(b)(7)(A), Tax Code], the employer, or o cials and employees or both,
contribute to a trust fund for the purpose of distributing to such o cials and
employees or their bene ciaries, the corpus and income accumulated by the trust in
accordance with the plan. [Sec. 2(d), Revenue Regulations No. 1-68] Republic Act No.
4917 [Section 28(b)(7)(A), Tax Code] provides for exemption from income tax only of
bene ts received by o cials or employees upon retirement, in accordance with the
BIR-approved Retirement Plan rules or written program. In other words, in order to be
exempt from the payment of income tax, the bene ts must be paid or distributed to the
o cials or employees upon their retirement from the service and not while they are still
in the employ of the company-employer. In the instant case, the earnings/income of the
personal contributions of the employees constitute bene ts (not retirement bene ts as
envisaged by the trust fund trustee to the employees not upon their retirement but
while they are still in the service of Franklin Baker. Consequently, pursuant to Section
53(b) of the Tax Code as amended, any and all amounts actually distributed or paid
from the Franklin Baker retirement fund to an employee-member withdrawing his
personal contributions shall be taxable to him in the year in which so paid or distributed,
such distribution having been effected before his retirement from Franklin Baker.
Neither Republic Act No. 4917 nor Section 28(b)(7)(A) of the Tax Code makes
mention of exemption from income tax of the earnings or income of the retirement plan
trust fund. Exemption from income tax of the earnings derived from investments of the
employees retirement fund are governed by another provision of the Tax Code, i.e.,
Section 53(b) of the Tax Code. Under Section 53(b) of the Tax Code, income of the
Trust Fund from its investments are exempt from income tax except however, as
heretofore stated, the interest income and/or yield from Philippine bank deposits and
deposit substitutes of the trust fund which is subject to the 20% nal withholding tax.
There are three parties in an employees' trust which has quali ed as a reasonable
private retirement trust plan under Section 28(b)(7)(A) of the Tax Code, namely: the
trustor-employer, the trustee of the fund who must be independent from the employer-
trustor and the bene ciary or employee-members. The trust fund while still with the
trustee is exempt from income tax on income from investment of said fund, except of
course on interest income and/or yield from Philippine bank deposits and deposit
substitutes; and continues to be so exempt when paid or distributed to the employee-
members upon retirement in accordance with the Plan rules. In fact, the trustee is
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 exempt from ling income tax return. Conversely, if such earnings are paid or
distributed to the employee-members withdrawing their personal contributions to the
fund, before their retirement date or age as provided for in the Plan rules, the same are
taxable to them in the year in which so paid or distributed, such distribution having been
effected before their retirement from employer-company.
Moreover, the provisions of Section 212 of the Income Tax Regulations and then
Section 57 [now Section 54] of the Tax Code do not apply to an income tax exempt
employees' trust, speci cally that which quali es as a private retirement bene t plan
under Section 28(b)(7)(A) of the Tax Code because it has no net income to speak of.
Net income as de ned under Section 36 of the Income Tax Regulations implementing
then Section 28 of the Tax Code means gross income less statutory deductions.
Because of the deletion of the exempting and preferential tax treatment provisions
under then Sections 21(d), 24(cc), and 53(d)(1) of the Tax Code by P.D. 1959 which
took effect October 15, 1984, the single 15% (now 20%) rate is imposable on all
interest income from deposits, deposit substitutes, trust funds and similar
arrangement, regardless as to the tax status or character of the recipients thereof.
(Revenue Memorandum Circular No. 31-84) Consequently, any nal tax paid by the
trustee of the retirement trust fund is a tax paid by the trustee for the trust fund and
while the fund (personal contributions of employees and employer contributions) is still
with the trustee and therefore cannot be credited in favor of the distributee-employee
who is actually a distinct and separate party of the trust, independent from the
taxpayer-trustee.
By and large, it is not correct to apply to the earnings or income of the
employees' personal contributions (part of the Franklin Baker retirement trust fund) the
provision of Section 1(f) of Revenue Regulations No. 6-85 otherwise known as the
Revised and Consolidated Expanded Withholding Tax Regulations which is applicable to
trusts other than a qualified private employees' retirement trust fund.
In view of the foregoing considerations, this O ce is of the opinion as it hereby
holds that the earnings of the employee-members' personal contributions (whether or
not said earnings were subjected to income tax to the fund) which will also be paid or
returned to them shall be subject to the withholding tax on wages (not to the creditable
expanded withholding tax) and are taxable to the recipient employee-member to the
extent of the entire amount thereof in the year in which so paid or distributed at the
rates prescribed by Section 21(a) in relation to Section 71, Chapter X, Title II of the Tax
Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue
Regulations No. 6-82 as amended. (See also BIR Ruling No. 21(a)-000-00-216-83 dated
December 7, 1983) cdtech

Very truly yours,

(SGD.) EUFRACIO D. SANTOS

Deputy Commissioner

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