PTC Commercial Corporation

March 6, 2017 BIR RULING NO. 104-2017 Tax Code of 1997, as amended, Section 32 (B) (6) (a); BIR Ruling No. 154-2013 PTC Commercial Corporation Block 4, Lot 2, First Tondo Complex 2150 Velasquez St., Tondo, Manila Attention: Efren M. Cruz HR Manager Gentlemen : This refers to your letter dated March 31, 2014 requesting on behalf of Felix P. Lambot for a certificate of tax exemption on the latter's retirement benefits received from PTC Commercial Corporation . It is represented that Felix P. Lambot , with Tax Identification Number __________, had been an employee of PTC Commercial Corporation from November 26, 1998 up to January 9, 2014 when he retired from the company after reaching the age of sixty (60) years old and serving the company for more than fifteen (15) years; that he was a Warehouseman at the time he retired from the company; and that the company has no retirement plan but has a Collective Bargaining Agreement (CBA) covering its rank and file employee of which Felix P. Lambot was a member before his retirement. In reply, please be informed that Section 1 of Republic Act (R.A.) No. 7641, amending the Labor Code of the Philippines, provides for retirement pay to qualified private sector employees in the absence of any retirement plan in the establishment. It reads: "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) 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." The aforesaid provision allows the retirement of an employee upon reaching the retirement age as may be provided under the applicable CBA or other employment contract entered into by and between the employer and the employees of the company, and the parties to the CBA or 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. It is noted that there is a CBA covering the rank-and-file employees of PTC Commercial Corporation . Section 3, Article IX of the said CBA provides, to wit: "Section 3. Retirement Pay. The COMPANY agrees to grant all employees a retirement pay in accordance with law." Pursuant to the above provision, while PTC Commercial Corporation maintains a CBA for its company's rank-and-file employees, the retirement benefits that will be received by the employees will still be governed by Article 287 of the Labor Code, to wit: "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 ." On the taxability of the above retirement benefits, Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, states, thus: "Section 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (6) Retirement Benefits, Pensions, Gratuities, etc. (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) Applying the above provision, since the retirement benefits of Felix P. Lambot will be given to him in accordance with RA 7641, and since he is already sixty (60) years old and rendered more than fifteen (15) years of service in the company at the time of his retirement, his retirement benefits shall be exempt from income tax, and consequently from withholding tax imposed under Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended. ( BIR Ruling No. 154-13 dated April 29, 2013) However, 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. ( BIR Ruling No. 154-13 dated April 29, 2013) It is must be understood that the payment to Felix P. Lambot of his salaries and the payment of the 13th month pay and other benefits in excess of the PhP82,000.00 1 threshold shall be subject to income tax, and consequently to withholding tax, under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. ( BIR Ruling No. 154-13 dated April 29, 2013) 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.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Republic Act (R.A.) No. 10653, "An Act Adjusting the 13th Month Pay and other Benefits Ceiling Excluded from the Computation of Gross Income for Purposes of Income Taxation, Amending for the Purpose Section 32 (B), Chapter VI of the National Internal Revenue Code of 1997, as Amended." R.A. No. 10653 is being implemented by Revenue Regulations No. 3-2015.