BIR Ruling [DA-157-03]

May 14, 2003 BIR RULING [DA-157-03] Padilla Law Office 7/F Padilla-De Los Reyes Building 232 Juan Luna Street, Binondo M A N I L A Attention: Atty. Sabino Padilla, Jr. Gentlemen : This refers to your letter dated September 24, 2002 requesting for clarification or confirmation of your following opinion: "(1) An employee who is less than fifty years of age and/or who has rendered less than ten (10) years of service prior to retirement could still be entitled to retirement benefit under R.A. No. 7641; and "(2) Where the amounts accumulated and credited over the years for the retirement of an employee is not sufficient to cover the minimum retirement benefit provided in R.A. No. 7641, the employer is required under the second paragraph of R.A. No. 7641 to pay the difference. Does this mean that the portion drawn from the private benefit plan is subject to the fifty years of age and ten years of service requirement, while the amount received under R.A. No. 7641 is not subject to these two requirements." In reply thereto, please be informed as follows: (1) 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. "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. "xxx xxx xxx" Thus, the retirement age is that age established in the collective bargaining agreement or other applicable employment contract. Your opinion therefore, that under R.A. No. 7641, the actual retirement age may even be lower than fifty (50) years of age, but since it is a provision in the collective bargaining agreement or other applicable employment contract, that retirement age is controlling is hereby confirmed. TAacIE Paragraph 3 of Article 287 of R.A. No. 7641 provides viz. : "In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching age sixty (60) years or more, but not beyond sixty five (65) which is hereby declared the compulsory retirement, who has served at least five 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." Thus, the above provision will apply only in the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment. Said paragraph has fixed the compulsory retirement at age 60 or more but not beyond age 65 who has rendered at least five years of service in the establishment. Your opinion that it is entirely possible that an employee who is less than fifty years of age and/or who has rendered less than ten (10) years of service prior to retirement if that is specifically provided in the collective bargaining agreement or other applicable employment contract would be entitled to retirement benefits under R.A. No. 7641 is hereby confirmed. (2) Your opinion that the requirement of ten (10) years of service and fifty (50) years of age under a reasonable private benefit plan maintained by an employer under Section 32(B)(6)(a) of the Tax Code of 1997 do not apply to tax exempt retirement benefits under R.A. No. 7641 is hereby confirmed. (3) While under Section 32(B)(6)(a) of the Tax Code of 1997, the retirement benefits received under R.A. No. 7641 and those received in accordance with a reasonable private benefit plan maintained by the employer are both exempt from income tax, nevertheless retirement benefits received in accordance with a reasonable private benefit plan has certain requirements which must be complied with before the benefits can be tax exempt, i.e. , 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 retirement and that the benefits shall be availed of by an official or employee only once. Thus, the official or employee has to elect to retire either under R.A. No. 7641 where the retirement age is established in the collective bargaining agreement or other applicable employment contract or in their absence the compulsory retirement age is sixty (60) years of more but not beyond age 65 who has served at least five (5) years in the establishment, or under Section 32(B)(6)(a) of the Tax Code of 1997 whichever is more beneficial to the official or employee. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service