Whether the Retirement Benefit to be Received by Qualified Private Sector Employees under Republic Act No. 7641 is Subject to Income Tax

April 6, 1994 BIR RULING NO. 086-94 21 000-00 086-94 Hon. Undersecretary Cresenciano B. Trajano Department of Labor and Employment Intramuros, Manila S i r : This refers to your letter dated August 13, 1993 requesting for opinion on whether or not the retirement benefit to be received by qualified private sector employees under Republic Act No. 7641 is subject to income tax. cdtech In reply thereto, please be informed that Section 1 of Republic Act No. 7641 provides that 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 declared as the compulsory retirement age, and 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. It is a cardinal rule in taxation that exemption should be construed strictissimi juris because it is highly disfavored in law; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466). Republic Act No. 7641 does not provide for the tax exemption of the retirement benefit to be received by the private sector employees. The exemption from income tax of retirement benefits to be received by private employees under Republic Act No. 4917 [now Section 28(b)(7)(A), Tax Code] cannot be applied to the retirement benefits to be received by the private sector employees under Republic Act No. 7641 because Section 28(b)(7)(A) of the Tax Code provides that in order to be exempt from income tax, the retirement benefits must be received by officials and employees of private firms, whether individuals or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided that the employee had been in the service of the same private firm for at least ten (10) years, and (2) he is at least fifty (50) years old at the time of retirement. Moreover, the private retirement benefit plan must be submitted to this Office for determination of qualification as a reasonable retirement benefit plan within the contemplation of Section 28(b)(7)(A) of the Tax Code, as amended, and as implemented by Revenue Regulations No. 1-68 as amended by Revenue Regulations No. 1-83. Furthermore, the tax exemption of retirement benefits/gratuities under Section 28(b)(7)(A) of the Tax Code cannot also be applied to the retirement benefit under R. A. No. 7641 because the income tax exemption provision of Section 28 (b)(7)(C) of the Tax Code explicitly covers social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public . In view thereof, this Office is of the opinion and so holds that the retirement benefit to be received by a private sector employee under R. A. No. 7641 is subject to income tax, and consequently, to the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code. cdti Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue