BIR Ruling

July 18, 1967 Messrs. Sycip, Gorres, Velayo & Co. Certified Public Accountants 6760 Ayala Avenue Makati, Rizal Attention: Mr . B . V . Abela Gentlemen : This refers to your request for an opinion of this Office on the application of Republic Act No. 4917 based on the set of facts stated in your letter, dated July 12, 1967. Republic Act No. 2917, entitled "An Act Providing that Retirement Benefits of Employees of Private Firms Shall Not be Subject to Attachment, Levy, Execution, or Any Tax Whatsoever", was signed by the President on June 7, 1967. Your stated that your client, Caltex (Philippines), Inc., has an employees' provident fund plan, which is represented as a qualified employee pension plan under the provisions of the Tax Code, to which it makes contributions for the purpose of distributing to the employees the earnings and principal of the fund thus accumulated, and that it is provided in the plan that at no time shall any part of the corpus or income of the fund be used for, or diverted to, any purpose other than for the exclusive benefit of the Caltex employees; that your client also implemented last year a redundancy program whereby certain employees whose functions and services would be displaced by business machines are given the option to elect a one-time separation payment and be entitled to receive a certain amount based upon their length of service in the company and the amount of salary they are receiving on the date of retirement; and, that, accordingly, a Caltex employee who elects to retire under the one-time separation plan is entitled to two types of payments, namely: a) The retirement benefits that he has earned under the employees' provident fund, and b) The one-time separation payments under the redundancy program. You also stated that the employees of Caltex who have elected to retire in accordance with the foregoing plans of the company are classified into four (4) groups, as follows: cdtech 1. Employees who have been employed with Caltex for at least 10 years and who are at least 50 years of age at the time retirement, but who have elected to retire prior to June 17, 1967 and have received in full the retirement benefits due to them under the employees' provident fund plan and the one time separation plan. 2. Employees having the same qualifications as those in No. 1 above and who have elected to retire before June 17, 1967, but have received only partial payments of the retirement benefits to which they are entitled as of June 17, 1967, and who expect to receive the balance of said benefit payments after said date. 3. Employees having the same qualifications as those in Nos. 1 and 2 above, who have elected to retire prior to June 17, 1967 but have not yet received any payment prior to June 17, 1967 and will received the same after said date. 4. Employees who have not been in the service of the company for at least 10 years and or are not at least 50 years of age at the time of retirement, but who have been retired under the redundancy program of the company because of the displacement of human labor with mechanization processes adopted by the company. Based on the foregoing set of facts, your have posed the following questions: 1. Will the employees covered in No. 1 above be entitled to claim the tax exemption benefits allowed under Republic Act No. 4917? If so, may they file a claim for refund on the taxes withheld from them by Caltex at the time payments to them were made? In effect, will the law be given retroactive application to cover retirement or separation payments received by the retiring employees prior to June 17, 1967? 2. With respect to the employees covered in No. 2 above, assuming that the law may not be given a retroactive effect, will they be entitled to the benefits of tax exemption on the two types of payments they will receive after June 17, 1967? 3. With respect to the employees covered in No. 3 above, will the two types of payments they will receive from the employees' provident fund and from the company be entitled to tax exemption granted under the Act such that Caltex need not withheld any tax on such payments? 4. With respect to the employees covered in No. 4 above, will the amount to be received by the employee or by his heirs from the company as a consequence of his retirement or separation under the redundancy program be entitled to the exemption benefits under the Act? In reply thereto, please be informed that this Office subscribes with your view that the two types of payments mentioned above fall squarely within the provisions of Republic Act No. 4917. According to this Act, the retirement benefits received by officials and employees, who have been in the service of the same private firm for at least 10 years and who are not less than 50 years of age at the time of retirement are exempt from all taxes, provided that the retirement benefits are in accordance with a reasonable private benefit plan maintained by the employer. The Act further states that the term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his officials and employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. Since your client's employees' provident fund meets this definition, the payments made therefrom to its officials and employees who meet the qualifications called for in the Act are exempt from all taxes. aisadc Likewise, the one-time separation payments made pursuant to the redundancy program instituted by your client, which is necessitated by the displacement of human labor by the mechanization processes it adopted, are also tax exempt. We are of the opinion that this displacement of human by mechanization is a "case of separation of an official or employee from the service of the employer due to . . . any cause beyond the control of the said official or employee . . ", as provided in the final proviso of Section 1 of the Act. Hence, separation payments to employees arising from the redundancy program are exempt from income tax, irrespective of the age or length of service of the employee. Coming now to the question as to whether or not Republic Act No. 4917 may be given retroactive application so as to exempt from taxes the retirement or separation payments received by your client's retiring employees prior to the approval of the law on June 17, 1967, we believe that the same cannot be legally supported. It is a settled rule that laws have no retroactive effect unless the contrary is provided. Otherwise stated, a statute should be considered as prospective in its operation whether it enacts, amends or repeals a tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect. This rule applies with greater force in this present law considering that Section 2 thereof expressly provides that "this Act shall take effect upon its approval". (Filipinas Compania de Seguros vs. Commissioner of Internal Revenue, G.R. No. L-14880, April 29, 1960). Based on the foregoing, this Office is of the opinion and so holds that, irrespective of the date of their retirement, all payments on or after June 17, 1967 to all qualified retired or retiring employees of benefits due them under your client's separation plan are entitled to the tax exemption benefits under Republic Act No. 4917, and your client need not withhold any tax on such payments. However, all payments made before June 17, 1967 are subject to income tax. LLjur Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue