BIR Ruling [DA-404-04]

July 22, 2004 BIR RULING [DA-404-04] 32 (B) (6) (a); 052-00 Mr. Felipe A. Caisido 332 Zircon Street, Four Kings Subdivision Abangan Sur, Marilao Bulacan S i r : This refers to your letter dated March 1, 2004 stating that Heidelberg Philippines, Inc. has a reasonable retirement benefit plan duly approved by the BIR; that under its optional retirement plan, it provides that "HPH shall have the option to retire any employee upon his reaching the age of fifty-five (55) or twenty (20) years of service whichever comes first." that on May 26, 2004, a Certification was issued to you by An C. Estabillo, Chief Financial Officer of Heidelberg Philippines, Inc. granting you one (1) month pay for every year of service and six (6) months gratuity pay for the services which you have rendered for the past 14 years or in the respective amounts of P534,300.00 and P224,700.00 or with an aggregate amount of P749,000.00 to which the amount of P267,293.31 was withheld and remitted to the BIR representing the withholding tax on compensation; and that at the time of said retirement you were already 57 years of age. Based on the foregoing representations, you now request for a ruling that the separation benefits paid to you by Heidelberg Philippines, Inc. in the amount of P749,000.00 is exempt from income tax and consequently from the withholding tax under Section 32(B)(6)(a) of the Tax Code of 1997; and the subsequent refund of the amount of P267,293.31 which was erroneously withheld as withholding tax on compensation. 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 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 be excluded from gross income." In interpreting and applying the above-cited section, this Office in BIR Ruling No. 052-00 dated October 30, 2000 ruled that "There can be no uncertainty that the purpose of the above-quoted provision is to exclude the retirement benefits from income tax. The first clause of Section 32 stated so in plain language. The sole object of the two (2) conditions enumerated is in turn unmistakably to provide merely for the minimum requirement in order that the retirement benefits to be given to the official or employee may be exempt from income tax and consequently from withholding tax. However, the Retirement Plan Rules and Regulations of the company may provide that the normal retirement date or early/optional retirement date be more than what is required by the Tax Code. Consequently, in case of conflict between the Tax Code and the Retirement Plan Rules and Regulations, it is the latter that should prevail. "xxx xxx xxx" It is clear from the foregoing, that the optional retirement of the plan provides that the company may at its option retire any employee who upon reaching the age of fifty-five (55) years or twenty (20) years of service, whichever comes first. Thus, in order for the retirement benefits to be excluded from gross income, the employee availing of the optional retirement must be at least 55 years old and has rendered 10 years of service or must be at least 50 years old and has rendered 20 years of service to the company. Considering that upon your optional retirement, you are already 57 years old and has rendered 14 years of service to the company, you are already covered within the optional retirement plan. Accordingly, your retirement benefits paid to you by Heidelberg Philippines, Inc. is exempt from income tax and consequently from withholding tax. Such being the case, your request for the refund of the amount of P276,293.31 representing the erroneously withheld tax on compensation should be filed with the Revenue District Office in Makati within the period of two (2) years after the payment of the aforesaid tax pursuant to Section 204 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. TDcAaH Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service