BIR Ruling [DA-221-11-97]

1997 BIR RULING [DA-221-11-97] Worldwide Church of God, Inc. Suite 602, Fil Garcia Tower Kalayaan Ave. cor. Mayaman St. Quezon City Attention: Mr . Eugenio M . Guzon Business Manager Gentlemen : This refers to your letter dated March 24, 1997 requesting for a ruling on the tax qualification of retirement plans and whether contributions to the retirement fund are subject to tax. casia It is represented that the Worldwide Church of God, Inc. has been conducting religious activities in the Philippines since 1962; that it decided to incorporate locally to have more flexibility in its operations, being a local corporate sole; that it was granted provisionally tax exempt status by the BIR in 1994; and that it plans to set up a retirement scheme for its employees in accordance with the provisions of Republic Act 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." In reply thereto, please be informed that R.A. 7641 is silent on the grant of tax exemption as regards retirement benefits received thereunder. Section 1 of RA 7641 merely provides for the qualification of private sector employees that are covered under that retirement scheme, but no mention is made whatsoever on the grant of tax exemption, to wit: "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 declared as the compulsory retirement age, and 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 month salary for every year of service, a fraction of at least six (6) months being considered as one whole year." It is a cardinal rule in taxation that tax exemption should be construed in strictissimi juris because it is highly disfavored in law; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications, (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466). If you wish to set up and maintain a retirement plan where the benefits received thereunder shall not be included in the gross income of the recipient-employee, it must be one that would fall within the contemplation of a "reasonable private benefit plan" under R.A. No. 4917 (now Sec. 28(b)(7)(A) of the Tax Code, as amended), the requirements of which are enumerated hereunder: "Retirement benefits 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 10 years and is not less than 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. For purposes of this subsection, the term " reasonable private benefit plan " means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be delivered to, any purpose other than for the exclusive benefit of the said officials and employees. Accordingly, retirement benefits received by a private sector employee under R.A. 7641 is subject to income tax and, consequently, to withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended, (BIR Ruling No. 086-94 dated April 6, 1994) while retirement benefits received from a plan created under the provisions of R.A. 4917 (now Sec. 28(b)(7)(B) of the Tax Code, as amended) shall be considered as an exclusion from gross income and therefore not forming part of the taxable income. Very truly yours, SIXTO S. ESQUIVIAS IV OIC, Asst. Commissioner (Legal Service) By: ESTER R. IBAEZ OIC, Head Rev. Exec. Asst. (Legal Service)