Exemption of Retirement Benefits, Pensions, Gratuities, etc. Received by Officials and Employees of Private Firms from Taxation

August 8, 1989 BIR RULING NO. 161-89 28 (b) (7) (A) 000-00 161-89 Gentlemen : This refers to your letter dated April 2, 1989 requesting a ruling as to whether or not the gratuity pay that your Company pays to its retiring employees falls within the purview of Section 28(b)(7)(A) of the Tax Code, hence exempt from the payment of tax. It is represented that your Company, under the Collective Bargaining Agreement signed with the International Oil Factory Workers' Union-NATU, which represents the regular rank-and-file employees and laborers of your company, has agreed to grant gratuity pay as follows: Article IX GRATUITY PAY "Sec. 1. The Company shall grant a gratuity pay as follows: 15 years to 25 years 5 days per year of service over 20 years to 25 years 10 days per year of service over 25 years to 30 years 17 days per year of service over 30 years or upon reaching the age of 60 years 25 days per year of service Those employees who may die during the effectivity of this Agreement are entitled to such gratuity benefits as above provided, which they might have already earned at the time of death." that in the implementation of the said agreement, your Company does not maintain a "plan" where contributions are made; and that instead, your Company provides payments for the gratuity pay out of its general funds, as the need arises. In reply, please be informed that under Section 28(b)(7)(A) of the Tax Code, as amended, retirement benefits, pensions, gratuities, etc. received by officials and employees of private firms, whether individuals or corporate, in accordance with a reasonable private benefit plan maintained by the employer , shall not be included in gross income and shall be exempt from taxation under Title II of the Tax Code. Provided, that the retiring official or employee has been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of his retirement and that the benefits granted shall be availed of by an official or employee only once. For this purpose, the term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of same or all of his officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. Pursuant to Section 6 of Revenue Regulations No. 1-68 of the Private Retirement Benefit Plan Regulations, implementing Republic Act No. 4917 [now Section 28(b)(7)(A), Tax Code] before availing of the tax exemption privileges, "employees must secure a prior determination of the qualifications of the plan by submitting to the Commissioner of Internal Revenue BIR Form No. 17.60 duly filled out and accompanied by the written program constituting the plan and the trust instrument." Such being the case, and since the gratuity pay you agreed to grant or pay to your retiring employees pursuant to the Collective Bargaining Agreement you signed with the International Oil Factory Workers' Union-NATU representing your regular rank-and-file employees and laborers is not in accordance with a reasonable private benefit plan as defined in Section 28(b)(7)(A) of the Tax Code and its implementing regulations, this Office is, therefore, of the opinion as it hereby holds that the said gratuity pay does not fall within the purview of Section 28(b)(7)(A) of the Tax Code, hence, subject to tax under Title II of the same Code. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner