BIR Ruling

June 10, 1968 Vera & Jacinto Law Office R-301 LUZCO Bldg., 360 David st., Between Escolta and Dasmarias Manila Attention: Mr . Casiano M . de Vera Gentlemen : This refers to your letter dated March 6, 1968 requesting information on a query stated as follows: "In behalf of a client "X", we respectfully request for a ruling or opinion whether the retirement benefits consisting of monthly pensions he receives from "A" company is exempt from income tax under the provision of R.A. No. 4917, approved June 17, 1967. The fact and circumstances of the case are as follows: cdt "Company "A", a domestic corporation doing business in the Philippines since a few years before World War II, retired its former President and General Manager, Mr. "X", about 60 years of age, and who has been in the service since the organization of the Company or well over the ten (10) years period stipulated in the law, and as a gratuity, he is being given or paid a monthly pension of a few thousand pesos. No retirement Fund was established because the Company did not deem it necessary as it has funds with which to meet the pension payments. Besides there was no law then requiring the creation of a fund. "All the requirement of Republic Act No. 4917 have been complied except that there was no Retirement Fund for the reasons stated above. The law, however, merely stipulates that the retirement benefits must be in accordance with a reasonable private benefits plan maintained by the employer. As explained in the law, the plan means a pension, gratuity, stock bonus or profit sharing plan. Since there was no Fund created, it amounts to the contribution by the employer alone which is allowed by law. "Considering the foregoing facts and circumstances, our question are: (1) Are the pensions received by Mr. "X" from company "A" exempt from all taxes? (2) Shall the benefits of exemption be availed of only from the date Republic Act No. 4917 became effective? (3) Are all the pensions received during the year 1967 exempt from income tax?" In reply, I have the honor to inform you that 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 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, 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. It will be noted that for a plan to qualify as a "reasonable private benefit plan" under the Act, it is required that said plan be funded. Since the retirement plan referred to in your query is unfunded, the payments made under said plan to its officials and employees as in the case of Mr. "X", are subject to income tax. acd It is a well-settled rule that laws have no retroactive effect unless the contrary is provided. In other words, a statute should be considered as prospective in its operations 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). Accordingly, the tax-exemption under R.A. 4917 can only be availed of for pensions received on or after June 17, 1967 which is the date of the effectivity of said Act. Mr. "X" is therefore, subject to income tax on the retirement benefits received by him either before or after the effectivity or R.A. 4917. Besides, even if Mr. "X" retired after June 17, 1967, the exemption of his retirement benefits and all other employees and officials of Company "A" can only be determined after the latter shall have submitted to this Office its retirement plan and the same is found to be reasonable. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue