BIR Ruling No. 167-12

March 9, 2012 BIR RULING NO. 167-12 Section 32 (B) (6) (a) of the Tax Code of 1997, as amended; BIR Ruling No. 163-2011; BIR Ruling No. 171-2011; BIR Ruling No. 199-2011 Isetann Department Store, Inc. C.M. Recto Ave.,cor. Evangelista St. and Quezon Blvd., Quiapo, Manila Attention: Mr. Eddie O. Go Asst. Accounting Manager Gentlemen : This refers to your letter dated July 13, 2011, requesting for exemption from the payment of withholding tax on retirement benefits of your retiring employee pursuant to a Collective Bargaining Agreement (CBA). It is represented that Rafael M. Villapaa is an employee of ISETANN DEPARTMENT STORE, INC. with a regular status as Bad Order Clerk of Traffic Department from October 2, 1984. He will retire on August 14, 2012 after completing 28 years in service. It is further represented that ISETANN DEPARTMENT STORE, INC. and NAGKAKAISANG MANGGAGAWA NG ISETANN (NMI-SUPER) entered into a CBA, Section 13 of which provides, to wit: "Section 13. Retirement Pay. The Company agrees to give retirement pay pursuant to existing laws." In reply thereto, please be informed that pursuant to Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, retirement benefits received under Section 1 of Republic Act No. 7641 1 shall not be included in the gross income and therefore not forming part of the taxable income. Under the said Act, 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 the compulsory retirement age, who has served at least five (5) years in the service of the same employer, 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. ( BIR Ruling No. 163-2011 dated May 23, 2011 ) DHcTaE Considering that the CBA specifically provided that the provisions of the existing laws shall be applicable as regards the retirement benefits of its employees, R.A. 7641 will apply in this case. Accordingly, Rafael M. Villapaa may be retired upon reaching the retirement age as provided for in R.A. No. 7641. Thus, any retirement benefits received pursuant to the Act is exempt from income tax and consequently, from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997. ( BIR Ruling No. 163-2011 dated May 23, 2011 ) 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. ( BIR Ruling No. 199-2011 dated June 29, 2011 ) It is, however, understood that this exemption does not include the payment of the separated employees' salaries and the payment of the 13th month pay and other benefits in excess of the Php30,000.00 threshold under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. ( BIR Ruling No. 199-2011 dated June 29, 2011 ) 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "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 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 (1) whole year."