Philippine School of Business Administration

January 16, 2008 BIR RULING [DA-014-08] Philippine School of Business Administration 1029 Aurora Blvd. Quezon City Attention: Mr. Juan D. Lim Vice President for Finance/Treasurer Gentlemen : This refers to your letter dated November 22, 2007 requesting, in effect, for legal opinion on exemption from the payment of withholding tax on retirement/separation benefits. TAEcCS As represented, at least three (3) of your school's former faculty members have elected, opted or decided to retire before the age of 65, the compulsory age provided under Republic Act (RA) No. 7641. SDTIaE Philippine School of Business Administration (PSBA) does not maintain any private benefit plan for its employees. However, PSBA maintains a collective bargaining agreement (CBA). In reply, please be informed that Section 32 (B) (6) (a) of the Tax Code of 1997 provides, viz .: "(a) Retirement benefits received under R.A. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, that the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: . . ., shall not be included in gross income and shall be exempt from taxation." cAEaSC Accordingly, retirement benefits received under Republic Act (R.A.) No. 7641 shall not be included in gross income and shall be exempt from income tax effective January 1, 1998. On the other hand, the retirement benefits to be received by private sector employees under Section 32 (B) (6) (a) of the Tax Code of 1997 are exempt from income tax provided that their employers maintain a qualified retirement benefit plan duly approved by the BIR. Section 1 of R.A. No. 7641, otherwise known as an "Act Amending Article 287 of Presidential Decree No. 442, as amended, otherwise known as the Labor Code of the Philippines, by Providing for Retirement Pay to Qualified Private Sector Employees in the Absence of any Retirement Plan in the Establishment" provides, viz .: "Section 1. Article 287 of Presidential Decree No. 442, as amended, otherwise known as the Labor Code of the Philippines, is hereby amended to read as follows: Art. 287. Retirement Any employee may be retired upon reaching the retirement age established in the collective bargaining agreement or other applicable employment contract. DcSACE In case of retirement, the employee shall be entitled to receive such retirement benefits as he may have earned under existing laws and any collective bargaining agreement and other agreements: Provided, however, that an employee's retirement under any collective bargaining and other agreements shall not be less than those provided herein. In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) which is declared the compulsory retirement age, who has served at least five (5) years in the establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one (1) whole year." AcICTS Based on the foregoing, R.A. No. 7641 will apply only in the absence of any retirement plan, collective bargaining agreement or other applicable employment contact in the establishment. Under the said Act, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) which is declared the compulsory retirement age, who has served at least five (5) years in the service of the employer, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one (1) whole year. Under Section 32 (B) (6) (a) of the Tax Code of 1997, the employee must have rendered ten (10) years of service to the company; and be at least fifty (50) years of age at the time of retirement, otherwise the retirement benefits to be paid to him shall be subject to income tax and consequently to withholding tax. cSTHAC It appears that PSBA maintains a collective bargaining agreement providing for retirement benefits of its employees. Accordingly, your faculty members may be retired upon reaching the retirement age established in the CBA. Thus, any retirement benefits received pursuant to the CBA is exempt from income tax and consequently, from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997 (BIR Ruling No. DA-527-2004 dated October 11, 2004). In case of claims for refund by the affected employees, PSBA shall refund the withholding tax deducted from the retirement benefits of the affected employees if the said tax has not yet been remitted to the BIR. Otherwise, any claim for refund of taxes withheld from retirement benefits should be filed with the concerned Revenue District Office/BIR Office where the taxpayer is registered or required to be registered pursuant to Unnumbered Memoranda dated July 26, 2000 and August 15, 2001 and Revenue Delegation Authority Order (RDAO) No. 3-2002 dated February 15, 2002. cAHIST Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service