Taxability of Retirement Benefits of Employee Who Failed to Comply with the Conditions on Early/Optional Retirement

October 30, 2000 BIR RULING NO. 052-00 Far East Bank and Trust Company Far East Bank Center Senator Gil J. Puyat Avenue Makati City Attention: Atty . Mildred Maranan-Garcia Gentlemen : This refers to your letter dated June 15, 1999 stating that your client has a trusteed retirement plan, with you acting as the trustee; that Section 3 of its Plan Rules and Regulations provides "SEC. 3. Early/Optional Retirement. "Upon attainment of at least age 55 or upon completion of twenty-five (25) years of service, a participant may be retired at the option of the Company and shall be entitled to the actuarially reduced retirement pay equivalent to eighty seven and a half percent (87.5%) of the normal retirement benefit less the employer's accumulated value under the Pag-IBIG Fund." that an employee of your client recently retired; that he is 51 years of age and has rendered 23 years of continuous service; and that following the provisions of the Plan Rules, the employee's retirement is not covered by the provision on Early/Optional Retirement which requires at least 55 years of age or at least 25 years of service. In connection therewith, you now request for an opinion/clarification as to whether or not the retirement benefits to be received by the retired employee who is 51 years of age and has rendered 23 years of continuous service to the company are exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(a) of the Tax Code of 1997. In reply, please be informed that Section 32(B)(6)(a) of the Tax Code of 1997 provides "(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." 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. ACHEaI Such being the case, while Sec. 3 of the Retirement Plan Rules and Regulations of your client provides that upon the attainment of at least age 55 or upon the completion of twenty-five (25) years of service the employee may be retired at the option of the company, the employee availing of the early/optional retirement must have rendered ten (10) years of service to the company or must be at least age 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. Accordingly, the retired employee in this particular case, although he is 51 years of age and has rendered 23 years of continuous service to the company is still not covered under the early/optional retirement for failure to comply with the conditions as provided in Section 3 of the said Plan i.e., attainment of at least age 55 or completion of twenty-five (25) years of service. In fine, the retirement benefits to be paid to the said retired employee shall be subject to income tax and consequently to withholding tax prescribed under Section 57(B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. 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, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue