BIR Ruling [DA-158-04]

April 2, 2004 BIR RULING [DA-158-04] Section 32 (B) (6) (a) BIR Ruling No. 050-98 & DA-114-2002 Mr. Rodolfo Barrinuevo Brgy. Aplaya, Sta. Rosa Laguna S i r : This refers to your letter dated June 27, 2003 indorsed to this Office by the Office of the President on August 26, 2003 requesting, in effect, for exemption from the payment of withholding tax on your retirement benefits. It is represented that you have been employed by your company for 20 years; that you are 45 years old; that you want to apply for optional retirement due to weakness of body; that you were informed that the P300,000.00 you will receive from the company as your retirement pay will be subject to P70,000.00 tax; and that you feel the P70,000.00 withholding tax will be enough to start a small business, hence, this request. 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." 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. Under Section 32(B)(6)(a) of the Tax Code of 1997, the employee availing of the early/optional retirement must have rendered ten (10) years of service to the company and must 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. It appears that your employer does not maintain a retirement plan so that the provisions of R.A. No. 7841 will apply. 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. Based on the foregoing and since at the time of your retirement you were forty five (45) years of age and has rendered twenty (20) years of service, the retirement benefits you will receive pursuant to R.A. No. 7641 are subject to income tax and consequently, to the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997 ( BIR Ruling No. DA-114-2002 dated July 2, 2002 ). CTDAaE Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service