BIR Ruling

August 13, 1974 Mr. Senen C. Lim Vice-President Security Bank and Trust Company 371 Escolta, Manila S i r : This refers to your letter dated May 10, 1974 requesting a ruling on the following queries: "1. Do we share with the Bureau of Internal Revenue the thinking that under Presidential Decree No. 220 a retiring employee is exempt from income tax even if he is not covered by any format retirement plan, or even if he does not meet the requirements of Section 1 B of Revenue Regulation No. 1-68, that is, "The retiring official or employee must have been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of retirement"? "2. What is the effect of Presidential Decree No. 220 on the income tax liability of retirement plan trust funds which are not registered with the Bureau of Internal Revenue for tax exemption privileges? "3. If a retirement plan is not registered with the Bureau of Internal Revenue are the contributions of the employer under a contributory plan eligible as deductions as operating expense? "4. Exactly what is the appropriate interpretation of "retiring employees or workers" under Presidential Decree No. 220? In other words, would the benefits of an employee who is separated voluntarily or involuntarily from employment before his retirement age be also tax exempt under Presidential Decree No. 220?" aisadc In reply thereto, I have the honor to inform you as follows: Presidential Decree No. 220 does not cover the retirement benefits or pensions of officials and employees of private firms in the Philippines which shall continue to be governed by Republic Act No. 4917 as amplified by Revenue Regulations No. 1-68. (par. 2, Sec. 2, Rev. Regs. No. 6-73 dated July 10, 1973 implementing Presidential Decree No. 220). Pursuant to Republic Act No. 4917, the retirement benefits received by officials and employees who have been in the service of the same private firm for at least ten (10) years and who are not less than fifty (50) years of age at the time of retirement are exempt from all taxes provided that the retirement benefit plan maintained by the employer. However, in order that retiring employees who are meet the qualifications called for by the Act may avail of the tax exemption benefit under Republic Act No. 4917, the employer-company must submit to this Office, B.I.R. Form No. 17.60 duly filled out and accompanied by a written program constituting the plan and the trust instrument; otherwise, the benefits to be received by the retiring employee under the plan shall be subject to the withholding tax. If the plan meets the requirements of Republic Act No. 4917 as implemented by Revenue Regulations No. 1-68, the employer can deduct its contributions to the retirement fund. However, the amount of contributions which an employer may deduct differ with respect to the three types of plans, i. e., stock bonus, pension and profit-sharing plans. (par. 2605.013, p. 30,030, Vol. 3 CCH (1970) for income tax purposes, the employer may deduct, within reasonable limits, contributions to the plan as they are made. Under Section 30(j) of the National Internal Revenue Code as amplified by Section 118 of the Income Tax Regulations, the deductions are as follows: (a) contributions by the employer during the taxable year to cover the pension liability accrued during that year may be deducted as business expense; and (b) one-tenth (1/10) of the contributions by the employer to fund past service costs may be deducted for the taxable years in which the contributions are made and for each of the nine succeeding taxable years. An employee's contribution to a pension trust (under a contributory plan) is no deductible from his taxable income. (See also B.I.R. Ruling No. 73-003 dated February 8, 1973). Finally, Presidential Decree No. 220 which took effect on June 20, 1973 exempts from Philippine income tax social security benefits, gratuities, pensions and other similar benefits arising out of employment abroad and received by employees and workers who are retired and who came to reside in the Philippines for the remaining years of their lives, be they citizens of the Philippines or not, and whether the employer is a foreign government or a foreign private entity. The exemption equally applies to such incomes received by citizens of the Philippines after their retirement from the same sources even if they should continue to reside in the foreign country where they were employed or in any other country where they may emigrate after their retirement. (Rev. Regs. No. 6-73 supra ) In other words, social security benefits, gratuities, pensions or other similar benefits received by resident citizens, resident aliens and non-resident citizens from foreign governments or from foreign private entities during the taxable year 1973, i. e., January 1 to December 31, 1973 and thereafter shall be exempt from Philippine income tax. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5