BIR Ruling [DA-426-05]

October 12, 2005 BIR RULING [DA-426-05] Open Doors P.O. Box 1573 QCCPO 1155 Quezon City Attention: Ms. Amelia U. De Ramos Finance and Administration Manager Gentlemen : This refers to your letter dated April 21, 2005 requesting for clarification as to whether the retirement benefits provided under Republic Act (R.A.) No. 7641 shall be subject to withholding tax. In reply thereto, please be informed that 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. HASDcC "xxx xxx xxx" Thus, the retirement age is that age established in the collective bargaining agreement or other applicable employment contract. Under R.A. No. 7641, the actual retirement age may even be lower than fifty (50) years of age, but since the collective bargaining agreement or other applicable employment contract is deemed the law between the parties, the agreed age of retirement shall become the basis in determining the taxability of retirement benefits of the taxpayer's employer. Otherwise, the provision of paragraph 3 of R.A. No. 7641 as afore-quoted shall apply. It is clear that the above provision will apply only in the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment. Said paragraph has fixed the compulsory retirement at age 60 or more but not beyond age 65 and who has rendered at least five years of service in the establishment. SUCH BEING THE CASE, the official or employee who receives retirement benefits provided under R.A. No. 7641 shall not be subject to income tax and consequently to withholding tax. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service