BIR Ruling [DA-544-99]

September 21, 1999 BIR RULING [DA-544-99] National Development Company NDC Building, 116 Tordesillas Street Salcedo Village, Makati City Attention: Mr . Esmeraldo E . Sioson Assistant General Manager Gentlemen : This refers to your letter dated April 12, 1999 stating that under the new GSIS law (R.A. 8291), a government employee who has rendered at least 15 years service and who is below 60 years of age at the time of resignation or separation is eligible for separation benefit in the form of a cash payment equivalent to 18 times the basic monthly pension payable at the time of separation plus the basic monthly pension for life upon reaching age 60; that the National Development Company (NDC), a government owned and controlled corporation, created by virtue of Republic Act No. 1648, as amended, has a Provident Fund duly approved by the BIR as tax exempt on July 22, 1996; that its purpose is to provide supplementary benefits to NDC employees when they retire, get disabled, or separated from the service; that the Provident Fund is contributory, such that it consists of contributions of both the employees and the employer; that these contributions which are based on the basic pay of the employees plus other funds of the Provident Fund were invested in the short-term investments; that prior to the issuance of the tax-exemption ruling of the BIR, earnings from the short-term investments of the Provident Fund were subjected to 20% final tax; that Section 32(B)(6)(f) provides that the benefits received from GSIS under the Republic Act No. 8291, including retirement gratuity received by government officials and employees are among those excluded from the gross income; and that BIR Rulings 96-97 and 107-97 exempts the benefits received from GSIS and gratuity pay of government employees who opted for optional retirement. LibLex In connection therewith, you are requesting confirmation of your opinion that: "1. The retirement gratuity mentioned in Section 32(B)(6)(f) of the National Internal Revenue Code includes the Provident Fund to be received by the subject employee in excess of his/her contributed amount and the terminal leave pay (i.e. commutation of unused vacation and sick leaves) of the subject separating employee and thus, excluded from the computation of taxable income; and "2. Assuming that the Provident Fund mentioned above is not among the exclusions from the taxable income of the subject separating employee, the earnings of the employee and employer shares which were already subjected to 20% final withholding tax upon previous investment/s will no longer be taxable as doing so would be tantamount to double taxation." In reply, please be informed that pursuant to Section 32(B)(6)(f) of the Tax Code of 1997, benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees shall not be included in gross income and shall be exempt from income tax. Under R.A. No. 8291 otherwise known as the Government Service Insurance System Act of 1997, a member who retires from the government service after rendering at least fifteen (15) years of service shall be entitled to the retirement benefits provided therein. The NDC Provident Fund was approved by this Office on July 22, 1996 as an employee's trust exempt from income tax under then Section 56(b) of the Tax Code for 1977 (now Section 60(B) of the Tax Code for 1977); and that the income of the trust fund from its investments are exempt from income tax, provided, that in its investment activities, no part of the corpus or income of the fund shall be used for or diverted to purposes other than for the exclusive benefit of the member-employees or their beneficiaries. Moreover, if the employee receives the NDC counterpart contributions plus earnings thereon before retirement, the entire amount is taxable to him in the year so distributed. Pursuant to Section 32(B)(6)(f) of the Tax Code of 1997, the benefits to be received from the NDC Provident Fund by the employee-members upon retirement in addition to and as part of their retirement gratuity from NDC shall be exempt from income tax. This means that, upon retirement, the total benefits which the employee shall receive consisting of his personal distributions, the NDC counterpart contributions and the income of the Fund to which the employee is entitled and is distributed to him shall be exempt from income tax. Such being the case, the benefits to be received from the GSIS under RA No. 8291 as well as the personal contributions to the NDC Provident Fund, the NDC counterpart contributions and the income of the fund plus the earnings thereon, in addition to and as part of the retirement gratuity by an employee of the NDC who opts to retire from the service after having rendered fifteen (15) years of service shall be excluded from gross income and shall be exempt from income tax. Moreover, the terminal leave pay, i.e., the unused vacation and sick leaves shall also be exempt from income tax. However, the payment of the salary of the retiring employee shall be subject to income tax. (BIR Ruling No. DA 265-96 dated July 22, 1996). 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group