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How qualified retirement plans must claim tax exemption

(Article published in the June 7, 2006 issue of Manila Standard Today)

         Far East Bank and Trust Co. was the financial institution that led the rest the way in trust investments.   To this day, even after the bank’s union with the Bank of the Philippine Islands, Far East Bank somehow manifests a presence in the field it pioneered in, i.e. investing the funds of qualified retirement plans.  Unfortunately, in the case of FEBTC, as trustee of various retirement funds vs. the Commissioner of Internal Revenue and the Court of Appeals, GR 138919, promulgated on May 2, 2006, Far East Bank has left a legacy to the trust industry consisting of lessons learned from its mistakes.

Justice Dante Tinga, writing for the Supreme Court, began his ponencia with a most heavy heart.  He said:

“The present petition evokes some degree of natural sympathy for the petitioner, as it seeks the refund of taxes wrongfully paid on the income earned by several retirement funds of private employees held by petitioner in their behalf. The steps undertaken by petitioner to seek the refund were woefully error-laden, yet their claims still received due solicitation from this Court. But in the end, the errors committed are just too multiple as well as consequential, and the claim for refund not sufficiently proven. Impulses may suggest that we reverse and grant, but logic and the law dictate that the Court affirm the assailed rulings of the Court of Appeals and the Court of Tax Appeals.”

Here is the factual background of the good justice’s lamentations.  Far East Bank was trustee of various qualified retirement plans established by several companies for its employees under Republic Act 4917, as amended. As trustee, the bank had the authority to hold, manage, invest and reinvest the funds set up under those plans.  It accordingly invested in various money market placements, bank deposits, deposit substitute instruments and government securities, all of which necessarily earned interest income.

The payors of the interest income, on the authority of what are now Section 24(B)(1) and Section 57(A) of the Tax Code,  withheld and paid to the Commissioner of Internal Revenue final taxes for the four quarters of 1993. It appears that the total of said final withholding taxes amounted to P6,049,971.83.

          As every trust investment officer who passed the basic trust course being given out yearly by the Trust Institute of the Philippines Foundation knows, RA 4917, as amended and now substantially found in Section 32(B)(6)(a)  together with Section 34(J) and Section 60(B) of the present Tax Code provides a system of tax incentives to the private sector to voluntarily provide for the retirement of its employees by way of setting up retirement trusts for them long before their actual retirement.

Section 60(B), which originated from RA 1983, effective on June 22, 1957, in particular, exempts retirement trusts from the income tax. This tax exemption, which is special in nature, as consistently claimed by the trust industry, prevails over the above-mentioned Section 24(B)(1) and Section 57(A) of the present Tax Code which are of general application.  This was essentially the ruling of the Supreme Court in the case of Commissioner of Internal Revenue vs. Court of Appeals, GR 95022, promulgated on March 23, 1992.

Accordingly, on four dates, May 12, 1993, Aug. 16, 1993, Jan. 31, 1994, and April 29, 1994, Far East Bank filed its written claim for refund with the Bureau of Internal Revenue for the first, second, third and fourth quarters of 1993, respectively, as required by now Section 229 of the Tax Code.  The BIR denied the claims for refund and the bank went to the Court of Tax Appeals. 

How come it lost such an apparently open-and-shut case?  Because, as Justice Tinga, in that portion of his decision earlier said, the route that Far East Bank took was “woefully error-laden.”

Error no. 1.  Instead of bringing a new a suit at the CTA to get a refund of the 1993 taxes, FEBTC sought to piggy-back on the 1993 tax refund claim on an already pending suit with the CTA case 4848, by filing instead a Motion to Admit Supplemental Petition.  But while the claims for 1993 involved the same issues that were the subject of Case 4848, they nevertheless related to a different taxable period.

Thus, CTA on Aug. 25, 1995 refused to admit the Supplemental Petition saying that CTA Case 4848 had already been pending for more than two and a half years and the admission of the supplemental petition, with a substantial enlargement of Far East Bank’s original claim for refund, would further delay the proceedings, causing as it would, an effective change in the cause of action.    The CTA advised a separate petition for review.

The bank, however, took the advice and filed the judicial claim for refund for the 1993 taxes only on Oct. 9, 1995.  This case was docketed as CTA case 5292.  By this time, it is obvious that the two year period for bringing a judicial action for refund has already lapsed for those taxes which were collected on the first, second and third quarters of 1995.  Also lapsed are the claims for taxes paid in the fourth quarter, prior to Oct. 9, 1995.  This was exactly the position taken by the CTA in its decision dated Sept. 11, 1998 dismissing case 5292.  This stance eventually found favor with the Supreme Court, which ruled that the mere motion to admit supplemental petition is not the same as filing a suit in court.   

But, how about those taxes paid from Oct. 9, 1993 till the end of the year?  Surely, FEBTC, as trustee, was entitled to a refund of those taxes.

Yes, but then, Error no. 2 kicked in.  To prove its right (or more precisely the right of the retirement trust plans’ right) to refund, the bank limited its evidence to the following: the list of the various funds; the schedule of taxes withheld on a quarterly basis in 1993; the written claims for refund; the BIR Rulings on the various retirement plans; the trust agreements of the various retirement plans; and certifications of the accounting department of petitioner, Citibank, and the Bangko Sentral ng Pilipinas as to the taxes that they respectively withheld.

No proof was presented to establish the specific transactions of the various funds, which gave rise to the payment of interest, such as confirmation receipts and purchase orders.  Moreover, the certifications of Citibank, BSP and Far East Bank’s own accounting department totaled to the aggregate amount of P40,000,000 in final withholding taxes; but the claim for refund amounted to only around P6,000,000.00.  Thus, the total may have included nonexempt interest paid to Far East Bank. In short, there was no sufficient showing which of those interests were earned by which of the tax-exempt retirement funds.

       In fairness to the trustee bank, it gallantly appealed the decision of the CTA to the Court of Appeals.  But whatever chance there was to ease the impact of its errors was snuffed out by Error no. 3.   The trustee bank failed to accompany its petition for review with, as required by Section 6 of Rule 43 of the Rules of Court, certified true copies of such material portions of the record referred to in its petition and other supporting papers.  This failure deprived the Court of Appeals of the opportunity to ascertain the veracity of its submissions for purpose of determining the threshold issue of whether or not to give the petition due course.  Thus, the Court of Appeals was considered by the Supreme Court to have rightfully dismissed the petition under the authority of Section 7 of Rule 43.

         The ponente’s rue that attended his beginning was still there when he ended.  He wrote:

       “It is tragic that the ultimate loss to be borne by the tardy claim for the refund would be not by the petitioner-bank, but the hundreds of private employees whose retirement funds were reposed in petitioner’s trust. However, the damage was sustained due to multiple levels of incompetence on the part of the petitioner which this Court cannot simply give sanction to. Many of the so-called procedural hurdles could have been overlooked, even by this Court, but in the end, the claim for tax refund was simply not proven with the particularity demanded of an action seeking to siphon off the nation’s ‘lifeblood’.”