BIR Ruling [DA-337-A-05]

August 3, 2005 BIR RULING [DA-337-A-05] Section 32 (B) (6) (a); BIR Ruling No. DA114-02 Mr. Jose T. Flores 19 Mabuhay St. Diliman, Quezon City S i r : This refers to your letter dated April 15, 2005 requesting for a ruling on whether or not you are entitled to a refund of the tax withheld from your retirement pay. It is represented that on August 1, 2004, at the age of seventy (70) years old, you retired from Philippine Racing Club, Inc., after having been employed as member of the Board of Stewards for eight (8) years and five (5) months; that your employer is a private firm located at AP Reyes Avenue, Makati City and engaged in horse racing; that you received a retirement pay in the amount of P202,642.96; and that a tax in the amount of P45,786.07 was withheld from your retirement pay. 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. aDSIHc 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. 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 (CBA) 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. Whether your retirement pay is exempt from income tax and consequently, to withholding tax will depend on whether your employer maintains a qualified retirement plan, CBA or other applicable employment contract in the establishment providing for retirement benefits of its employees in which case such plan, CBA or contract will apply. In the absence thereof, R.A. No. 7641 will apply. Please be guided accordingly. aATCDI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service