COMMISSIONER OF INTERNAL REVENUE, PETITIONERS, VS. THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL RETIREMENT PLAN, REPRESENTED BY ITS TRUSTEE-DIRECTOR, RESPONDENTS.

This case is said to be precedent setting. While the amount involved is insignificant,
the Solicitor General avers that there are about 85 claims of the same nature
pending in the Court of Tax Appeals and Bureau of Internal Revenue totalling
approximately P120M.

Petitioner, the Commissioner of Internal Revenue, seeks a
reversal of the Decision of respondent Court of Appeals, dated August 27, 1990,
in CA-G.R. SP No. 20426, entitled “Commissioner of Internal Revenue vs.
GCL Retirement Plan, represented by its Trustee-Director and the Court of Tax
Appeals,” which affirmed the Decision of the latter Court, dated 15
December 1986, in Case No. 3888, ordering a refund, in the sum of P11,302.19, to the GCL
Retirement Plan representing the
withholding tax on income from money market placements and purchase of treasury
bills, imposed pursuant to Presidential Decree No. 1959.

There is no dispute with respect to the facts. Private Respondent, GCL Retirement Plan
(GCL, for brevity) is an employees’ trust maintained by the employer, GCL Inc.,
to provide retirement, pension, disability and death benefits to its
employees. The Plan as submitted was
approved and qualified as exempt from income tax by Petitioner Commissioner of
Internal Revenue in accordance with Rep. Act No. 4917.^[1]

In 1984, Respondent GCL made investments and earned therefrom
interest income from which was withheld the fifteen per centum (15%) final
withholding tax imposed by Pres. Decree No. 1959,^[2] which
took effect on 15 October 1984, to wit:

On 15 January 1985, Respondent GCL
filed with Petitioner a claim for refund in
the amounts of P1,312.66 withheld by Anscor Capital and Investment Corp.,
and P2,064.15 by Commercial Bank
of Manila. On 12 February 1985, it
filed a second claim for refund of the amount of P7,925.00 withheld by Anscor,
stating in both letters that it disagreed with the collection of the 15% final
withholding tax from the interest income as it is an entity fully exempt from
income tax as provided under Rep. Act No. 4917 in relation to Section 56 (b)^[3]
of the Tax Code.

The refund requested having been denied, Respondent GCL elevated
the matter to respondent Court
of Tax Appeals (CTA). The latter 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. Upon appeal, originally to this Court, but referred to respondent Court
of Appeals, the latter upheld the CTA Decision. Before us now, Petitioner assails that disposition.

It appears that under Rep. Act No. 1983, which took effect on 22
June 1957, amending Sec. 56(b) of the National Internal Revenue Code (Tax Code,
for brevity), employees’ trusts were exempt from income tax. That law provided:

“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 of property
held in trust, including –

x x x              x x x

(b)     Exception. – The tax imposed by this Title shall not
apply to employees’ trust which forms part of a pension, stock bonus or
profit-sharing plan of an employer for the benefit of some or all of his
employees (1) if contributions are made to the trust by such employer, or
employees, or both, for the purpose of distributing to such employees the
earnings and principal of the fund accumulated by the trust in accordance with
such plan, x x x “

On 3 June 1977, Pres. Decree No. 1156 provided, for the first
time, for the withholding from the interest on bank deposits at the source of a
tax of fifteen per cent (15%) of said interest. However, it also allowed a specific exemption in its Section 53,
as follows:

“SEC. 53. Withholding of tax at source. –

x x x                    x
x x

“(c)    Withholding
tax on interest on bank deposits. –
(1) Rate of withholding tax. – Every bank or banking institution shall
deduct and withhold from the interest on bank deposits (except interest paid or
credited to non-resident alien individuals and foreign corporations), a tax
equal to fifteen per cent of the said interest: Provided, however, That no withholding of tax shall be made if
the aggregate amount of the interest on all deposit accounts maintained by a
depositor alone or together with another in any one bank at any time during the
taxable period does not exceed three hundred fifty pesos a year or eighty-seven
pesos and fifty centavos per quarter. For this purpose, interest on a deposit account maintained by two
persons shall be deemed to be equally owned by them.

“(2)    Treatment of
bank deposit interest. – The interest income shall be included in the gross
income in computing the depositor’s income tax liability in according with
existing law.

“(3)    Depositors
enjoying tax exemption privileges or preferential tax treatment. – In all
cases where the depositor is tax-exempt or is enjoying preferential income tax
treatment under existing laws, the withholding tax imposed in this paragraph
shall be refunded or credited as the case may be upon submission to the
Commissioner of Internal Revenue of proof that the said depositor is a
tax-exempt entity or enjoys a preferential income tax treatment.

x x x              x
x x “

This exemption and preferential tax treatment were carried over
in Pres. Decree No. 1739, effective on 17 September 1980, which law also
subjected interest from bank deposits and yield from deposit substitutes to a
final tax of twenty per cent (20%). The
pertinent provisions read:

“SEC. 2. Section 21 of
the same Code is hereby amended by adding a new paragraph to read as follows:

SEC. 21. Rates of tax on citizens or residents. ?

x x x                   x
x x                 x x x

Interest from Philippine Currency bank
deposits and yield from deposit substitutes whether received by citizens of the
Philippines or by resident alien individuals, shall be subject to the final tax
as follows: (a) 15% of the interest on
savings deposits, and (b) 20% of the interest on time deposits and yield from deposit
substitutes, which shall be collected and paid as provided in Sections 53 and
54 of this Code. Provided, That no tax
shall be imposed if the aggregate amount of the interest on all Philippine
Currency deposit accounts maintained by a depositor alone or together with
another in any one bank at any time during the taxable period does not exceed
Eight Hundred Pesos (P800.00) a year or Two Hundred Pesos (P200.00) per
quarter, Provided, further, That if the recipient of such interest is exempt
from income taxation, no tax shall be imposed and that, if the recipient is
enjoying preferential income tax treatment, then the preferential tax rates so
provided shall be imposed (Emphasis supplied).

“SEC. 3. Section 24 of
the same Code is hereby amended by adding a new subsection (cc) between
subsections (c) and (d) to read as follows:

(cc) Rates of tax on interest from deposits and yield from deposit
substitutes. – Interest on Philippine
Currency bank deposits and yield from deposit substitutes received by domestic
or resident foreign corporations shall be subject to a final tax on the total
amount thereof as follows: (a) 15% of
the interest on savings deposits; and (b) 20% of the interest on time deposits
and yield from deposit substitutes which shall be collected and paid as
provided in Sections 53 and 54 of this Code. Provided, That if the recipient of such interest is exempt from
income taxation, no tax shall be imposed and that, if the recipient is enjoying
preferential income tax treatment, then the preferential tax rates so provided
shall be imposed” (Underscoring ours).

“SEC. 9. Section 53(e)
of the same Code is hereby amended to read as follows:

SEC. 53(e) Withholding of final tax on interest on bank deposits
and yield from deposit substitutes. –

(1) Withholding of final
tax.? Every bank or non-bank financial intermediary shall deduct and
withhold from the interest on bank deposits or yield from deposit substitutes a
final tax equal to fifteen (15%) per cent of the interest on savings deposits
and twenty (20%) per cent of the interest on time deposits or yield from
deposit substitutes: Provided, however,
That no withholding tax shall be made if the aggregate amount of the interest
on all deposit accounts maintained by a depositor alone or together with another
in any one bank at any time during the taxable period does not exceed Eight
Hundred Pesos a year or Two Hundred Pesos per quarter. For this purpose, interest on a deposit
account maintained by two persons shall be deemed to be equally owned by them.

(2) Depositors or
placers/investors enjoying tax exemption privileges or preferential tax
treatment. – In all cases where the
depositor or placer/investor is tax-exempt or is enjoying preferential income
tax treatment under existing laws, the with holding tax imposed in this
paragraph shall be refunded or credited as the case may be upon submission to
the Commissioner of Internal Revenue of proof that the said depositor,
placer/investor is a tax exempt entity or enjoys a preferential income tax
treatment.”

Subsequently, however, on 15 October 1984, Pres. Decree No. 1959
was issued, amending the aforestated provisions to read:

“SEC. 2. Section 21(d)
of this Code, as amended, is hereby further amended to read as follows:

(d) On interest
from bank deposits and yield or any other monetary benefit from deposit
substitutes and from trust fund and similar arrangements. ?
Interest from Philippine Currency Bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar
arrangements whether received by citizens of the Philippines or by resident
alien individuals, shall be subject to a 15% final tax to be collected and paid
as provided in Sections 53 and 54 of this Code.

“SEC. 3. Section
24(cc) of this Code, as amended, is hereby further amended to read as follows:

(cc) Rates of tax on
interest from deposits and yield or any other monetary benefit from deposit
substitutes and from trust fund and similar arrangements. – Interest on Philippine Currency Bank
deposits and yield or any other monetary benefit from deposit substitutes and
from trust fund and similar arrangements received by domestic or resident
foreign corporations shall be subject to a 15% final tax to be collected and
paid as provided in Section 53 and 54 of this Code.

“SEC. 4. Section 53(d)
(1) of this code is hereby amended to read as follows:

Sec. 53(d) (1). Withholding
of Final Tax. – Every bank or non-bank financial intermediary or
commercial, industrial, finance companies, and other non-financial companies
authorized by the Securities and Exchange Commission to issue deposit
substitutes shall deduct and withhold from the interest on bank deposits or
yield or any other monetary benefit from deposit substitutes a final tax equal
to fifteen per centum (15%) of the interest on deposits or yield or any other
monetary benefit from deposit substitutes and from trust fund and similar
arrangements.”

It is to be noted that the exemption from withholding tax on
interest on bank deposits previously extended by Pres. Decree No. 1739 if the recipient (individual or
corporation) of the interest income is exempt from income taxation, and the
imposition of the preferential tax rates of the recipient of the income is enjoying preferential income tax
treatment, were both abolished by Pres. Decree No. 195 1959. Petitioner thus submits that the deletion of
the exempting and preferential tax treatment provisions under the old law is a
clear manifestation that the single 15% now 20%) rate is imposable on all interest incomes from deposits, deposit substitutes, trust
funds and similar arrangements, regardless of the tax status or character of
the recipients thereof. In short,
petitioner’s position is that from 15 October 1984 when Pres. Decree No, 1959
was promulgated, employees’ trusts ceased to be exempt and thereafter became
subject to the final withholding tax.

Upon the other hand, GCL contends that the tax exempt status of
employees’ trusts applies to all kinds of taxes, including the final
withholding tax on interest income. That exemption, according to GCL, is derived from Section 56(b) and not
from Section 21(d) or 24(cc) of the Tax Code, as argued by Petitioner.

The sole issue for determination is whether or not the GCL Plan
is exempt from the final withholding tax on interest income from money placements
and purchase of treasury bills required by Pres. Decree No. 1959.

We uphold the exemption.

To begin with, it is significant to note that the GCL Plan was
qualified as exempt from income tax by the Commissioner of Internal Revenue in
accordance with Rep. Act No. 4917 approved on 17 June 1967. This law specifically provided:

SECTION 1. Any provision
of law to the contrary notwithstanding, the retirement benefits received by
officials and employees of 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
official or employee concerned to the private benefit plan or that arising from
liability imposed in a criminal action;” x x x (emphasis ours).

In so far as employees’ trusts are concerned, the foregoing
provision should be taken in relation to then Section 56(b) (now 53[b]) 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 of property
held in trust,

x x x              x x x                 x x x

“(b) Exception. – The
tax imposed by this Title shall not apply to employee’s trust which forms part
of a pension, stock bonus, or profit-sharing plan of an employer for the
benefit of some or all of his employees x x x”

The tax-exemption privilege of 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 of 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 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 in Rep. Act No. 1983, Section 56(b), 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. Enlightening is a portion of 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, etc. benefits for employees outside the Social
Security Act be exempted from income taxes.” (Congressional Record, House
of Representatives, Vol. IV, Part. 2, No. 57, p. 1859, May 3, 1957; cited in
Commissioner of Internal Revenue v. Visayan Electric Co., et al., G. R. No.
L-22611, 27 May 1968, 23 SCRA 715); underscoring supplied.

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 of 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.

The deletion in Pres. Decree No. 1959 of the provisos regarding
tax exemption and preferential tax rates under the old law, therefore, can not
be deemed to extend to employees’ trusts. Said Decree, being a general law, can not repeal by implication a specific
provision, Section 56(b) (now 53 [b]) in relation to Rep. Act No. 4917 granting
exemption from income tax to employees’ trusts. Rep. Act 1983, which excepted employees’ trusts in its Section
56(b) was effective on 22 June 1957 while Rep. Act No. 4917 was enacted on 17
June 1967, long before the issuance of 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 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 (Villegas v. Subido, G.R. No. L-31711, 30 September
1971, 41 SCRA 190).

Notably, too, all the tax provisions herein treated of come under
Title II of the Tax Code on “Income Tax.” Section 21(d), as amended
by Rep. Act No. 1959, refers to the final tax on individuals and falls under
Chapter II; Section 24(cc) to the final tax on corporations under Chapter III;
Section 53 on withholding of final 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 56(a), supra, explictly excepts employees’
trusts from taxes imposed by this Title.” Since the final tax and the
withholding thereof are embraced within the title on “Income Tax.” it
follows that said trust must be deemed exempt therefrom. Otherwise, the exception becomes
meaningless.

There can be no denying either that the final withholding tax is
collected from income in respect of which employees’ trusts are declared
exempt (Sec. 56[b], now 53[b], Tax Code). 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.

Petitioner also relies on Revenue Memorandum Circular 31-84,
dated 30 October 1984, and Bureau of Internal Revenue Ruling No. 027-e-000-00-005-85,
dated 14 January 1985, as authorities for the argument that Pres. Decree No.
1959 withdrew the exemption of employees’ trusts from the withholding of the
final tax on interest income. Said
Circular and Ruling pronounced that the deletion of the exempting and
preferential tax treatment provisions by Pres. Decree No. 1959 is a clear
manifestation that the single 15% tax rate is imposable on all interest income
regardless of the tax status or character of the recipient thereof. But since we herein rule that Pres. Decree
No. 1959 did not have the effect of revoking the tax exemption enjoyed by
employees’ trusts, reliance on those authorities is now misplaced.

WHEREFORE, the Writ of Certiorari
prayed for is DENIED. The judgment of
respondent Court of Appeals, affirming that of the Court of Tax Appeals is
UPHELD. No costs.

SO ORDERED.

Narvasa, C.J., (Chairman), Gutierrez Jr., Cruz, Paras,
Feliciano, Padilla, Bidin, Griño-Aquino, Medialdea, Regalado, Davide, Jr.,
Romero, and Nocon, JJ., concur.

^[1]
“An Act Providing that Retirement Benefits of Employees of Private Firms shall
not be subject to Attachment, Levy, Execution, or any Tax whatsoever,”
promulgated June 17, 1967.

^[2]
Entitled “Amending Certain Sections of the National Internal Revenue Code,
as amended.”

^[3]
Now Section 53 (b).