BIR Ruling [DA-330-97]

September 29, 1997 BIR RULING [DA-330-97] Jardine Davies, Inc. Jardine Davies Building 222 Sen. Gil J. Puyat Avenue 1200 Makati City Attention: Mr. B.S. Chungunco Vice-President Gentlemen : This refers to your letter dated November 18, 1996 requesting for a ruling on the tax treatment of the early retirement benefits to be received by your qualified employees, and, the effects of Republic Act No. 7641 on the said benefits. It is represented that Hawaiian-Philippine Company (HPCO) is a domestic corporation engaged in the production of sugar with offices at Silay City; that it maintains a trusteed non-contributory retirement plan which, among other things, entitles an employee who reaches the age of fifty-five (55) and has rendered at least fifteen (15) years of service to avail of your Employees' Early Retirement Plan; that the early retirement benefits available under the said Retirement Plan consist of one (1) month pay for every year of service; that as part of HPCO's vision to be globally competitive, and meet the challenge of market uncertainties and the drop in sugar prices, it is compelled to adopt productivity initiatives and right sizing measures; that among these measures is an early retirement program open to all employees; that under this program, qualified employees will be entitled to an early retirement package consisting of two (2) months for every year of service; and that a number of employees who wish to avail of the program are over fifty years old who have rendered at least ten (10) years of service, and have not availed of a tax exemption privilege under any retirement benefit plan. In connection therewith, you now request for a ruling regarding: "(1) The tax treatment of early retirement benefits received by employees who are at least fifty-five (55) years old and have rendered at least fifteen (15) years of service; aDHCAE "(2) The tax treatment of early retirement benefits of employees who are at least fifty (50) years of age but below fifty-five (55) years old and who have rendered at least ten (10) years of service; and "(3) The effect of the provisions of Section 6 of the Implementing Rules of Republic Act No. 7641 (Retirement Pay Law) on the early retirement benefits to be received by the above-mentioned employees." In reply, please be informed as follows: (1) Under Republic Act No. 4917 [now Section 28 (b) (7) (A) of the Tax Code, as amended], "the retirement benefits to be received by officials and employees of a private employer, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer, shall be exempt from taxes . . .; 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 retirement." Considering that the Hawaiian-Philippine Company Employees' Retirement Plan has qualified as a reasonable retirement benefit plan on September 30, 1996, its provision on Early Retirement Benefits, particularly Section 4 (2) (A) thereof, which provides for an early retirement of "any member in service who is 55 years of age or over, but has not attained the age of 60, and has rendered 15 or more years of creditable service," is in compliance with the minimum requirements of the aforementioned Section of the Tax Code, as amended. Accordingly, the retirement benefits to be received by the employees who are at least fifty-five (55) years old and have rendered at least fifteen (15) years of service shall be exempt from income tax and consequently from the withholding tax prescribed under Section 72, Chapter 10, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-85, as amended. EScaIT (2) Section 4 (2) (A) of the Hawaiian-Philippine Company Employees' Retirement Plan provides for the minimum requirements in order that the employee may avail of the early retirement benefits. Considering that the early retirement benefits to be received by the employees who are at least fifty (50) years of age but below fifty-five (55) years old and have rendered at least ten (10) but not more than fifteen (15) years of service are not qualified for early retirement under the aforementioned Plan, the benefits to be received by the said employee shall be subject to income tax and consequently to the withholding tax. (3) The provisions of Section 6 of the Implementing Rules of Republic Act No. 7641 will not have any effect on the retirement benefits to be received by your employees who will avail of your early retirement program but who are not yet qualified for early retirement under your plan. This is because Republic Act No. 7641 providing for retirement benefits to be received by qualified private sector employees is applicable only in the absence of a retirement plan or agreement providing for retirement benefits of employees in the company. Moreover, the retirement benefits to be received by a private sector employee under Republic Act No. 7641 are subject to income tax and consequently to withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code. (BIR Ruling No. 086-84 dated April 6, 1994) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV OIC, Asst. Commissioner Legal Service