BIR Ruling [DA-083-03]

March 17, 2003 BIR RULING [DA-083-03] 32 (B) (6) (a) DA-018-03 Esquivias Cruz Conlu & Yabut U2402 Jollibee Plaza Bldg. Emerald Avenue, Ortigas Centre Pasig City Attention: Atty. P. Winston G. Conlu Gentlemen : This refers to your letter dated October 18, 2001 seeking for a clarificatory ruling on the following issues: 1. Whether or not the stand taken by the Regional Director of Region No. 16 requiring Alsons to pay Donor's tax on the one month company assistance paid to the retiring employee is correct; 2. Whether Alsons acted correctly in withholding the tax on the said one (1) month basic pay for every year paid to the retiring employee by way of company assistance and/or whether the said payment is subject to withholding tax or not; 3. In the event that the company made an erroneous withholding of the tax on compensation payment to its employees, who is the proper party who should seek refund the company as the withholding agent or the employee-payee? relative to the taxability of retirement benefits, in the light of the ruling issued by RR No. 16 numbered RDA-RR-No. 16- Ruling No. 39-01 issued on August 14, 2001. It is represented that Alsons Cement Corporation (Alsons) maintains a retirement benefit plan providing for a retirement fund for the benefit of its employees; that the normal retirement age for qualified employees is upon reaching the age of sixty (60) years or when the employee has worked for the company for thirty (30) years; that likewise, early or optional retirement may be allowed when an employee reaches the age of fifty-five (55) years or after rendering twenty (20) years of service; that once an employee retires in accordance with any of these criteria, he is to receive one (1) month basic pay from the Retirement Fund Benefits; that in addition, the company provides for another one (1) month pay for every year of service by way of company assistance; that one of the qualified employees of Alsons, Mr. Alex Wong, retired from the service on December 31, 2001 at the age of 56 years after serving the company for a period of thirty (30) years; that pursuant to Alson's retirement policy, the said employee shall receive two (2) months pay for every year of service, one (1) month basic pay for every year of service coming from the Retirement Fund and the other one (1) month pay coming directly from the company; that Alsons did not withhold any tax on the one (1) month basic pay from the Retirement Fund Benefits due to Mr. Wong for being exempt under the law; that, however, with regard to the additional one (1) month basic pay for every year of service paid directly by the company, Alsons withheld the corresponding tax and remitted the same to the BIR; and that the retiring employee objected to the withholding of the tax and sought a ruling from BIR Regional Office No. 16, Cagayan de Oro which ruled that: "A. The one month pay from the retirement fund benefits shall be exempt from income tax and consequently from the withholding tax prescribed in Section 79, Chapter III, Title II of the Tax Code of 1997; B. The other one month company financial assistance does not constitute an additional income or salary since it is a gift or gratuity given by the company, such that the company should pay the Donor' Tax on the transaction." In reply, please be informed that under Section 32(B)(6)(a) of the Tax Code of 1997, retirement benefits received under Republic Act No. 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 shall not be included in gross income and shall be exempt from taxation under Title II of the said Code, Provided, that the retiring official or employee has 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 his retirement and that the benefits granted shall be availed of by an official or employee only once. Records of this Office show that Alsons does not maintain a private benefit plan duly approved by this Office but Alsons maintains a company policy under Alsons Human Resource Policies (ALCEM-HR-03-10) which provides, viz. : "ARTICLE IV RETIREMENT DATES SEC. 1. NORMAL RETIREMENT. The normal retirement date of a Member shall be the first day of the month coincident with or next following his attainment of age sixty (60) SEC. 2. EARLY RETIREMENT. Member may, with the approval of the Company, retire early on any first day of the month coincident with or following his attainment of age fifty-five (55) or after rendering twenty (20) years of service in the Company." "ARTICLE V PAYMENT OF BENEFITS SEC. 1. RETIREMENT BENEFIT. Upon retirement, a Member shall be entitled to a retirement benefit equal to 100% of his Final Monthly Basic Salary for every year of his Credited Service. Credit shall be given for an incomplete year at the rate of one-twelfth (1/12) of the full year's credit for each completed month of Credited Service. A fraction of six (6) months or more shall be considered one (1) whole year while for a fraction of less than six (6) months, the actual fraction of the year shall be used, based on 365 days per year." In addition, the company has an existing Collective Bargaining Agreement which provides: "Article XIII Retirement/Separation Benefits SEC. 1. Retirement Plan The Company and the Union agree that the present retirement plan shall be maintained. The Company and the Union further agree to include 20 years of service under the optional retirement scheme. The prerogative to accept or deny an early optional retirement application of any qualified employee rests solely on Management. The Company shall issue a general policy to the effect, copy furnished the Union. The present practice of giving retirement pay two (2) months base pay per year of service (1) month from retirement fund and 1 month company assistance shall be maintained." xxx xxx xxx Considering that Alsons does not maintain a "reasonable private benefit plan" duly approved by the BIR, then the provisions of Republic Act No. (RA) 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" shall apply. Sections 1 and 2 of R.A. 7641 provides, viz. : "SEC. 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. "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 benefits 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) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said 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 whole year. "Unless the parties provide for broader inclusions, the term one-half (1/2) month salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves. xxx xxx xxx" "SEC. 2. Nothing in this Act shall deprive any employee of benefits to which he may be entitled under existing laws of company policies or practices." Such being the case, the retirement benefit of two (2) months basic pay per year of service consisting of one (1) month from the retirement fund benefits and one (1) month from company assistance as provided in Alsons Collective Bargaining Agreement received by Mr. Alex Wong is exempt from income tax and consequently from the withholding tax under Section 79, Chapter III, Title II of the Tax Code pursuant to R.A. 7641 in relation to Section 32(B)(6)(a) of the Tax Code of 1997. (BIR Ruling No. DA-018-03 dated January 23, 2003) cSaATC Ruling No. RDA-RR16-Ruling No. 39-01 dated August 14, 2001 ruled to the effect that "The other one month company financial assistance does not constitute an additional income or salary since it is a gift or gratuity given by the company, such that the company should pay the Donor's Tax on the transaction" is erroneous. Accordingly, the same is hereby revoked. The one (1) month for every year of service company assistance which is provided in Art. XIII of the Collective Bargaining Agreement is part of the retirement package which is exempt from income tax pursuant to Section 32(B)(6)(a) of the Tax Code of 1997 in relation to Sections 1 and 2 of R.A. 7641. Moreover, considering that Alsons had already withheld and remitted the corresponding withholding tax, Mr. Alex Wong may file a written request for refund of the said withheld tax within two (2) years from the date of actual filing of the income tax return or the last day prescribed by law for filing the return whichever comes earlier, at the Revenue District Office/BIR Office where Mr. Wong is registered pursuant to Revenue Delegation Authority No. 3-2002 dated February 15, 2002. However, when on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid, the Commissioner may refund or credit the same even without a written claim therefor. In this case, the processing of the refund in favor of Mr. Wong should be done by the Revenue District Office No. 98, Cagayan de Oro City. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service