BIR Ruling [DA-199-05]

April 21, 2005 BIR RULING [DA-199-05] R.A. No. 7641 BIR Ruling No. DA-215-2004; SB-004-99 & SB-051-99 Mr. Manuel F. Yngson c/o Mr. Gil S. Querimit Stanplas Employee Association Standard Plastics Corporation Jojo Street, Baesa Quezon City S i r : This refers to your letter dated December 1, 2004 requesting, in effect, for exemption from the payment of withholding tax on your retirement benefits. It is represented that you have been employed by Standard Plastics Corporation (Stanplas) for twenty-one (21) years; that you were retired by Stanplas on February 28, 2001; that you received gratuity pay in three (3) installments; that despite of your protest, the amount of P24,700.00 was withheld from your retirement pay; that on September 30, 2004, Stanplas rehired you as process assistant; and that upon being rehired, you reiterated your protest for refund of the amount withheld from your retirement pay. 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. 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 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) 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 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, R.A. No. 7641 will apply only in the absence of any retirement plan, collective bargaining agreement or other applicable employment contract in the establishment. 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. AICHaS Under Section 32(B)(6)(a) of the Tax Code of 1997, the employee must have rendered ten (10) years of service to the company; and 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 maintains a collective bargaining agreement providing for retirement benefits of its employees. Section 1 of Article XIX of said agreement between Standard Plastics Corporation and Stanplas Employees Association-PTGWO jointly with the Philippine Transport and General Workers Organization specifically provides, viz: "SEC. 1. An employee may be retired at the option of the Company upon reaching the age of SIXTY (60) years or upon having completed more than TWENTY (20) years of service. However, the employee may apply for retirement upon reaching FIFTEEN (15) years of service subject to the availability of company funds." Accordingly, this Office is of the opinion and so holds that since you have rendered twenty-one (21) years of service, the retirement benefits you received pursuant to the aforestated collective bargaining agreement are exempt from income tax and consequently, to the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997. Moreover, pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The abovementioned law requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely: (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since your retirement was not of your own making, the same connotes involuntariness for being beyond your control. Hence, any and all amounts you received as a result thereof, are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter X, Title II of the Tax Code of 1997 as implemented by Revenue Regulations No. 2-98, as amended. 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 as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group