BIR Ruling [DA-164-03]

May 15, 2003 BIR RULING [DA-164-03] China Banking Corporation Dasmarias corner Juan Luna Streets Manila Attention: Ms. Gemma B. Deladia Senior Assistant Manager and Ms. Ma. Teresa S. Fideles Asst. Vice President Gentlemen : This refers to your letter dated July 17, 2002 requesting for clarification of BIR Ruling No. 050-98 dated April 27, 1998, where this Office ruled that "In reply, 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 you to your retiring workers 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 your afore-stated letter, you state that it is the contention of the legal counsel of your client that the retirement benefits are tax-exempt regardless of the age of the retiree premised on the interpretation of the above-cited ruling; and that you maintain that the retirement benefits under RA No. 7641 and those received by employees of private firms in accordance with a reasonable retirement plan shall not be included in gross income and shall be exempt from taxation provided that: (1) The retiring employee has been in the service of the same employer for at least ten (10) years; (2) The retiring employee is not less than fifty (50) years of age at the time of retirement; (3) That the benefits granted under said subparagraph shall be availed of only once. In reply thereto, please be informed that Section 32(B)(6)(a) of the Tax Code of 1997 provides that retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private forms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer are excluded from gross income and therefore exempt from income tax: Provided, further, that the benefits granted under this subparagraph shall be availed of by an official or employee only once. Under Section 1 of R.A. No. 7641, any employee may be retired upon reaching the retirement age established in the Collective Bargaining Agreement or other applicable employment contract. However, 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. HCEcaT Thus, under R.A. 7641, the retirement age may be established in the Collective Bargaining Agreement or other applicable employment contract, which may be lower than age fifty (50) and the employee may have rendered even less than ten (10) years of service. The requirement that the employee must be at least age fifty (50) and has rendered at least ten (10) years of service to the company at the time of retirement in order that the retirement benefit may be exempt from income tax applies only in cases where the employer, whether individual or corporate maintains a reasonable retirement benefit plan under Section 32(B)(6)(a) of the Tax Code of 1997 and duly approved by the BIR. It is therefore not correct to say that retirement benefits of officials and employees of private firms who are retiring under R.A. No. 7641 are tax exempt regardless of the age of the retiree. The retirement age is fixed in the collective bargaining agreement or other employment contract. Moreover, under Section 1 of R.A. No. 7641, in the absence of a retirement plan or agreement, an employee upon reaching age sixty (60) years or more but not beyond sixty-five (65) years 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. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service