BIR Ruling [DA-215-04]

April 20, 2004 BIR RULING [DA-215-04] 32 (B) (6) (a) DA-151-2004 Ms. Imelda C. Magdirila 40 San Jose Subdivision Mojon, Malolos, Bulacan M a d a m : This refers to your letter dated April 1, 2004 requesting for a ruling that the retirement benefits to be received by you shall be exempt from income tax and consequently from withholding tax. It is represented that you have been under the employ of Eastland Manufacturing Company for more than twenty five (25) years; retired at the age of fifty one (51) years old; and that you retired pursuant to the company's Collective Bargaining Agreement. In reply, please be informed that Section 32(B)(6)(a) of the Tax Code of 1997 provides as follows: "SEC. 32. Gross Income . "(A) . . . "(B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: . . . "(6) Retirement Benefits, Pensions, Gratuities, etc. (a) Retirement benefits received under Republic Act No. 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: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. . . ." It will be observed that under the afore-quoted provisions, retirement benefits may be received either under R.A. No. 7641 and in accordance with a reasonable private benefit plan maintained by the employer under then R.A. No. 4917 (now Section 32(B)(6)(a) of the Tax Code of 1997. 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. AIaDcH "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." Thus, R.A. No. 7641 providing for Retirement Pay to Qualified Private Sector Employees shall apply only in the absence of any Retirement Plan, collective bargaining agreement or other applicable employment contract in the establishment. Accordingly, under RA 7641, an employee upon reaching the age of sixty (60) years or more, but not sixty-five (65) years which is 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. Under R.A. No. 4917 [now Section 32(B)(6)(a) of the Tax Code of 1997], it is required that the following conditions must be present in order that the employee benefits may be granted tax exemptions: (1) the employee had been in the service of the same private firm for at least ten (10) years; and (2) he is at least fifty (50) years old at the time of retirement. Thus, if there is a retirement plan duly approved by the BIR, collective bargaining agreement or other applicable employment contract providing for retirement benefits, the same shall be followed and R.A. No. 7641 shall not apply. ( BIR Ruling No. DA-151-2004 dated March 31, 2004 ) Section 4, Article XVIII of the Collective Bargaining Agreement entered into between Eastland Manufacturing Company, Inc. and Kapatiran ng Mga Makabayang Obrero sa Eastland Manufacturing Company, Inc. (KAMAO sa EMCI) provides, viz : "SEC. 4. Retirement Pay Employees who have reached fifty (50) years of age shall have the option to retire and shall receive retirement pay equivalent to one (1) month or 30 days basic salary per year of service." Inasmuch as there is no qualified retirement plan, the provisions of the collective bargaining agreement providing for retirement age and benefit will apply provided that the same shall not be less than those provided for under R.A. 7641. In view thereof, the retirement benefits received by Ms. Imelda C. Magdirila are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997 pursuant to Section 32(B)(6)(a) of the Tax Code of 1997. This ruling is being issued on the bases 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service