BIR Ruling No. 063-13

February 12, 2013 BIR RULING NO. 063-13 Sec. 32 (B) (6) (a) NIRC; BIR Ruling No. 171-2011 Vijay Kumar Maheshwari Indo Phil Acrylic Manufacturing Corporation Indo Phil Compound Bo. Lambakin, Marilao, Bulacan Dear Mr. Maheshwari, This refers to your letter dated 12 December 2012 requesting exemption from income tax on your retirement benefits to be received from Indo Phil Acrylic Manufacturing Corp. (the " Company ") on account of your retirement upon reaching the age of sixty (60) years old on 5 March 2013. Based on the Certification dated 11 December 2012 submitted by the Company, it is shown that Mr. Vijay Kumar Maheshwari ("Mr. Maheshwari") , with Tax Identification No. 199-754-489, is a regular employee of the Company since 13 January 1996, occupying the position of Senior Engineering Manager of the Engineering Department and receiving a monthly remuneration of One Hundred Fifty Four Thousand and Seven Hundred Twenty One Pesos (PhP154,721.00). Mr. Maheshwari will be retiring from the Company on March, 2013 upon reaching sixty (60) years of age and rendering seventeen (17) years of service in the Company. In reply, please be informed that under Section 1 of Republic Act (R.A.) No. 7641, amending 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," it is provided, 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. cSEaTH 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) 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 ." (Underscoring supplied) The foregoing provision allows the retirement of an employee upon reaching the retirement age as may be provided under the applicable employment contract entered into by the Company and its employees, and the parties to the employment contract may agree on the retirement benefits that will be received by the employees provided that such benefits shall not be less than those provided under the Labor Code of the Philippines. In the absence of a retirement plan or other agreement providing for the retirement benefits of employees in the establishment, the retirement benefits as set forth under Section 1 of R.A. 7641 shall apply, i.e. , at least one-half (1/2) month salary for every year of service of an employee who has reached the age of sixty (60) years or more, but not beyond sixty-five (65) years, and rendered at least five (5) years of service in the company. In the absence of any showing that there is a reasonable retirement benefit plan or CBA established by the Company, Section 1 of R.A. No. 7641 shall apply in this case. As regards the taxability of the subject retirement benefits, Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, states, thus: " (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 ." (underscoring supplied) The retirement benefits received by an employee pursuant to R.A. 7641 are exempt from income tax by express provision of Section 32 (B) (6) (a) of the Tax Code of 1997, as amended. In the instant case, Mr. Maheshwari will be retiring from the Company on March, 2013 upon reaching the age of sixty (60) and rendering an aggregate period of seventeen (17) years of service in the Company, thus, the retirement benefits of Mr. Maheshwari , after having complied with the age and length of service requirements set forth in Section 1 of R.A. No. 7641, are not subject to income tax and consequently, to the withholding tax under Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended. (BIR Ruling No. 171-2011 dated May 25, 2011) TDcEaH Moreover, pursuant to Section 2.78.1 (A) (7) of RR 2-98, as amended, the terminal pay, i.e. , commutation and payment of monetized unused vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to the withholding tax. Conversely, the cash equivalent of vacation leave exceeding ten (10) days is subject to tax. However, this same principle cannot apply to sick leave credits since an employee must actually go on sick leave to be able to avail of said leave credits. It must be understood that the payment to Mr. Maheshwari of his salaries and the payment of the 13th month pay and other benefits in excess of the Php30,000 threshold shall be subject to income tax, and consequently to withholding tax. 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 as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue