Sunday, February 26, 2012

CIR vs. GCL Retirement Plan

Facts: GCL is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. As such, it was exempt from income tax. 

GCL made investments and earned interest income from which was withheld the fifteen per centum (15%) final withholding tax. 

GCL filed with CIR a claim for refund for the amounts withheld. GCL disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax. 

The refund requested having been denied, GCL elevated the matter to the CTA, which ruled in favor of GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax withheld. CA upheld the CTA Decision. 

CIR seeks a reversal of the decision. 

Issue: Whether or not GCL is exempt from the final withholding tax on interest income

Held:  YES. 

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 certain hazards to which members of the Plan 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 no other purpose. 

The tax advantage was conceived in order to encourage the formation and establishment of such private plans for the benefit of laborers and employees outside of the Social Security Act. 

It 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 a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law. 

There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt. The application of the withholdings 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 income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place. 


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