BIR Ruling [DA-319-04]

June 11, 2004 BIR RULING [DA-319-04] R.A. No. 7641 BIR Ruling No. DA-215-2004 Ms. Linda Humawid 1284 Kamatis St. Napico, Manggahan Pasig City M a d a m : This refers to your letter dated May 3, 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 Eastland Manufacturing Co., Inc. located at Jenny's Avenue, Rosario, Pasig City, for more than twenty-seven (27) years; that you are fifty-four (54) years old; that you retired in January 2004; and that you received your retirement pay and found out that your employer deducted the amount of PhP135,000.00 from it. 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 : DcCITS "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 employer 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. 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 4 of Article XVIII of said agreement between Eastland Manufacturing and Kapatiran ng mga Makabayang Obrero sa Eastland Manufacturing Company, Inc. ( KAMAO sa EMCI) specifically provides, viz : HSaEAD "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." In view of the foregoing, this Office is of the opinion and so holds that since at the time of your retirement you were fifty-four (54) years of age and has rendered twenty-seven (27) years of service, the retirement benefits you will receive 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service