BIR Ruling [DA-135-02]

August 21, 2002 BIR RULING [DA-135-02] Ms. Marcelina B. Cabaneiro C/O Victor R. Potenciano Medical Center 163 EDSA, Mandaluyong City M a d a m : This refers to your letter dated August 2, 2002 requesting for clarification of BIR Ruling No. DA114-2002 dated July 2, 2002, where this Office ruled that "In reply thereto, please be informed that pursuant to Section 32(B)(6)(a) of the Tax Code of 1997 retirement benefits received under Republic Act No. 7641 shall not be included in the gross income and therefore not forming part of the taxable income. Accordingly, the retirement benefits to be paid by VRPM to you under RA No. 7641 are not subject to income tax and consequently, to withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997." In the aforesaid letter, you stated that at the time of your retirement, you were fifty-three (53) years old and have been in the service of Victor R. Potenciano Medical Center (VRPM) for more than twenty-five (25) years; that VRPM has no retirement benefit plan duly approved by the BIR but it has a Collective Bargaining Agreement (CBA) with its employees; that pursuant to Section 2, Article X of the CBA, the compulsory/optional retirement benefits of its employees shall be paid as follows: (1) 10 years less than 15 years of service = 60% employee's latest salary; (2) 15 years less than 20 years of service = 80% employee's latest salary; (3) 20 years & above = 90% employee's latest salary; (4) above 25 years of service = 100% of employee's latest pay. and that under the afore-cited section, since you have been in the service of VRPM for more than twenty-five (25) years, you are entitled to a retirement pay of 100% of your latest pay for every year of service. In reply thereto, please be informed that the retirement benefits received under RA No. 7641 shall be excluded from gross income pursuant to Section 32(B)(6)(a) of the Tax Code of 1997. Section 1 of R.A. No. 7641 provides as follows: "Section 1. Section 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 or any collective bargaining agreement and other agreements. Provided, however, That an employee's retirement benefits under any collective bargaining agreement 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. "Section 2. Nothing in this Act shall deprive any employee of benefits to which he may be entitled under existing laws or company policies or practices. THDIaC Section 2, Article X of the CBA between the VRPM and its employees is an agreement between the parties which provides for the number of years of service for compulsory/optional retirement although nothing is mentioned about the age requirement for retirement purposes. The compulsory retirement age of 60 years or more but not beyond sixty-five (65) years and who has served at least five (5) years in the said establishment, shall apply only in the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment. Such being the case, and since you clearly fall under No. 4 of Section 2, Article X of the CBA i.e., "(4) above 25 years of service = 100% of employee's latest pay" although you are only 53 years of age, the retirement benefits received by you from VRPM shall not be subject to income tax and consequently, to withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service