BIR Ruling [DA-244-03]

July 25, 2003 BIR RULING [DA-244-03] 32 (B) (6) (a); 050-98 Lufthansa Technik Philippines, Inc. Villamor Air Base, Pasay City Attention: Mr. Thomas Gockel President & CEO Gentlemen : This refers to your letter dated March 9, 2003 requesting for a ruling as to whether or not the retirement benefits, to be paid to your employees who have reached 65 years of age and have rendered 10 years of service, under R.A. No. 7641 are exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(a) of the Tax Code of 1997. It is represented that Lufthansa Technik Philippines, Inc. (LTP) is a domestic corporation registered with the Securities and Exchange Commission (SEC) under SEC Registration No. A199919621 dated August 23, 2000, to engage in a globally competitive aircraft engine maintenance, repair and overhaul, aircraft components repair and overhaul; that LTP is located at LTP Technical Center, Macroasia Ecozone, Villamor Air Base, Pasay City; that LTP started its commercial operation on September 1, 2000; that on September 2000, LTP entered into an Asset Purchase Agreement with the Philippine Airline for the purchase of the PAL Technical Center located at Bo. Balabag, Villamor Air Base, Pasay City; that one of the conditions of the said purchase was that personnel of the Maintenance and Engineering Department of PAL who wish to transfer to LTP, regardless of age, shall be absorbed by LTP; that as an off shoot of this arrangement, although barely four years of operation, LTP has employees who have already reached the compulsory retirement age of 65 under the Labor Code of the Philippines. 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 . . . shall be excluded from gross income. 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 benefits 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) 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. "xxx xxx xxx" Thus, since LTP has no retirement plan duly approved by the BIR nor an employment contract with its employees providing for retirement age, its employees may retire under R.A. No. 7641 upon reaching the age of sixty (60) years or more but not beyond sixty-five (65) year which is declared as the compulsory retirement age who has served at least five (5) years in the establishment. Accordingly, the retirement benefits of employees of LTP who were retired from the service after reaching the age of 65 and have rendered 10 years of service shall be exempt from income tax and consequently from withholding tax prescribed under Section 79; Chapter XIII, Title II of the Tax Code of 1997. (BIR Ruling No. 050-98 dated April 27, 1998) ADECcI 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 null and void. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service