BIR Ruling [DA-527-04]

October 11, 2004 BIR RULING [DA-527-04] R.A. No. 7641 BIR Ruling No. DA-215-2004 Mr. Agustin D. Don c/o Mr. Gil S. Querimit Stanplas Employee Association Standard Plastics Corporation Jojo Street, Baesa Quezon City S i r : This refers to your letter dated September 27, 2004 requesting, in effect, for exemption from the payment of withholding tax on your retirement benefits. It is represented that you have been employed by Standard Plastics Corporation for twenty-two (22) years; that you are forty-five (45) years old; and that you retired on May 15, 2004. 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(2)(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. AcHaTE 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 XIX of said agreement between Standard Plastics Corporation and Stanplas Employees Association-PTGWO jointly with the Philippine Transport and General Workers Organization specifically provides, viz : "SEC. 1. An employee may be retired at the option of the Company upon reaching the age of SIXTY (60) years or upon having completed more than TWENTY (20) years of service. However, the employee may apply for retirement upon reaching FIFTEEN (15) years of service subject to the availability of company funds." In view of the foregoing, this Office is of the opinion and so holds that since at the time of your retirement you were forty-five (45) years of age and has rendered twenty-two (22) years of service, the retirement benefits you will receive pursuant to the aforestated collective bargaining agreement are exempt from income tax and consequently, to the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service