BIR Ruling [DA-391-05]

September 14, 2005 BIR RULING [DA-391-05] Section 32 (B) (6) (a); BIR Ruling No. DA-527-2004 & DA-659-04 Mr. Paul O. Remulta 163 Gen. Ricarte St. Cainta, Rizal S i r : This refers to your letter dated August 23, 2005 requesting, in effect, a ruling on your entitlement to a refund of the tax withheld from your separation benefits. As represented, you were employed by Venus Steel Corporation for sixteen (16) years. You were sixty (60) years old at the time of your retirement on May 10, 2005. The amount of PhP40,884.64 was deducted from your retirement pay. You are retiring under the collective bargaining agreement (CBA) maintained by your employer. 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: "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 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. DTAcIa 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 1 of Article X of said agreement between Venus Steel Corporation and Malayang Manggagawa sa Venus Steel Corp.-All Workers Alliance Trade Unions (AWATU) specifically provides, viz: "SEC. 1. The COMPANY agrees to grant separation pay in accordance with the provisions of the CBA Code to those regular employees or workers under the bargaining unit who may be separated from the service by reason of retirement, redundancy, failing health or serious medical reason." In relation to the above provision, the "whereas" clause of the Memorandum of Agreement by and between Venus Steel Corporation and Malayang Manggagawa Sa Venus Steel Corp.-All Workers Alliance Trade Unions reads "WHEREAS, pursuant to Article XXXII, Section 1 of the existing Collective Bargaining Agreement (CBA) between the parties, the parties are re-negotiating the pertinent provisions of the CBA for the period 2003-2005; WHEREAS, the parties have resolved and agreed on the following issues which shall form part of the CBA, unless otherwise indicated: xxx xxx xxx 2. RETIREMENT PAY The COMPANY shall provide retirement pay to all union members in the amount equivalent to thirty (30) day per year of service when they reached the age of sixty (60) years old or when disabled or with serious ailments. xxx xxx xxx" Section 204(C) of the Tax Code of 1997 provides that the Commissioner may credit or refund taxes erroneously or illegally received provided that the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax. Provided, however, that a return filed showing an overpayment shall be considered as a written claim or refund. In view of the foregoing, this Office is of the opinion and so holds that since you were sixty (60) years old at the time of your retirement on May 10, 2005, the retirement pay you received pursuant to the aforestated collective bargaining agreement is exempt from income tax and consequently, to the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997. The payment of your salaries, however, is subject to income tax and consequently to withholding tax. This serves as an authority for the Revenue District Office concerned to cause the refund of the taxes withheld from your separation benefits. 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service