BIR Ruling [DA-380-03]

October 20, 2003 BIR RULING [DA-380-03] International Manning Agents, Inc . 9th, and 10th Floors, Champaca II Building Alfaro Street, Salcedo Village Makati City Attention: Mr. Francisco A. Basilio General Manager Gentlemen : This refers to your letters dated July 2, 2003 and May 2, 2003 requesting for an opinion as to whether or not the retirement benefits paid over and above those required under R.A. No. 7641 are exempt from income tax and consequently from withholding tax; and that contributions of the employer to the retirement fund are deductible as business expense. It appears that in a BIR Ruling No. DA041-03 dated February 10, 2003, this Office ruled that ". . . pursuant to Section 32(B)(6)(a) of the Tax Code of 1997 retirement benefits under Republic Act No. 7641 shall not be included in the gross income and therefore not forming part of the taxable income. Accordingly, the retirement benefits to be paid by the Nautical Filipino Development under R.A. No. 7641 are not subject to income tax and consequently to withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997." 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. caCSDT 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" It is clear from the above provision that it merely provides for the minimum retirement benefits of one-half month for every year of service, in the absence of a retirement plan duly approved by the BIR or other employment contract. Thus, the employer may provide for its employees benefits more than what is provided under the aforesaid law. Accordingly, if International Manning Agents, Inc. (Nautical Filipino Development) pays retirement benefits, more than one-half month pay for every year of service, to its employees upon reaching the age of 60 years old and have rendered at least five (5) years of service, the said benefits shall likewise be exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(a) of the Tax Code of 1997. On the other hand, whatever contribution made by International Manning Agents, Inc. (Nautical Filipino Development) to the retirement fund is a deductible business expense under Section 34(A)(1)(a)(i) of the Tax Code of 1997. 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