BIR Ruling No. 177-11

May 27, 2011 BIR RULING NO. 177-11 Sec. 32 (B) (6) (a) & (b) of the Tax Code of 1997; BIR Ruling No. DA-527-04 Philippine School of Business Administration, Inc. 1029 Aurora Blvd. Quezon City Attention: Mr. Juan D. Lim Vice President for Finance/Treasurer Gentlemen : This refers to your letters dated July 19, 2010 and June 23, 2010 requesting, in effect, for an opinion that the Philippine School of Business Administration, Inc. (PSBA) is exempt from the obligation to withhold and remit the corresponding taxes due on the retirement/separation benefits to be paid to the following: ISCHET 1. Mr. Rolando B. Ablanida is sixty three (63) years old and has been a member of the PSBA, Inc.-QC faculty for sixteen (16) years has expressed his intention to retire prior to the compulsory age of 65; 2. Mrs. Antonia R. Cailo is sixty two (62) years old and has been a member of the PSBA, Inc.-QC faculty for fifteen (15) years and three (3) months has expressed her intention to retire due to health reason having been hospitalized for a partial left hip replacement; 3. Ms. Pacifica Del Pilar Camba is sixty three (63) years old and eleven (11) months and has been a member of the PSBA, Inc.-QC faculty for sixteen (16) years likewise expressed her intention to retire. It is represented that PSBA is a corporation duly registered with the Securities and Exchange Commission (SEC) with TIN 001-095-651-000; that it does not maintain any private benefit plan duly approved by the BIR for its employees; and that, however, PSBA maintains a collective bargaining agreement (CBA). In reply, please be informed that Section 32 (B) (6) (a) of the Tax Code of 1997 provides, viz. : "(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." Accordingly, retirement benefits received under Republic Act (R.A.) No. 7641 shall not be included in gross income and shall be exempt from income tax effective January 1, 1998. On the other hand, the retirement benefits to be received by private sector employees under Section 32 (B) (6) (a) of the Tax Code of 1997 are exempt from income tax provided that their employers maintain a qualified retirement benefit plan duly approved by the BIR. Section 1 of R.A. No. 7641, otherwise known as an "Act Amending Article 287 of Presidential Decree No. 442, as amended, otherwise known as 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" provides, viz. : DICSaH "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) which is declared the compulsory retirement age, who has served at least five (5) years in the 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 (1) whole year." Based on the foregoing, R.A. No. 7641 will apply when an employee retires upon reaching the retirement age established in the CBA. In the absence of any retirement plan, CBA or other applicable employment contract in the establishment, an employee, upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) which is declared the compulsory retirement age, who has served at least five (5) years in the service of the 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 (1) whole year. Under Section 32 (B) (6) (a) of the Tax Code of 1997, the employee must have rendered at least ten (10) years of service to the company and must be at least fifty (50) years of age at the time of retirement, otherwise the retirement benefits to be paid to him shall be subject to income tax and consequently to withholding tax. It appears that PSBA-QC maintains a CBA providing for retirement benefits of its employees. Section 1 of Article XXI of said agreement between PSBA-QC and the PSBA Faculty Association, Inc.-Quezon City provides "Section 1. Optional Retirement. All regular faculty members who has reached sixty (60) years of age, OR who has rendered an aggregate of ten (10) years of active service but has not yet reached the age of sixty (60), may, at his option, retire from the service of the SCHOOL, or he may be retired at the option of the SCHOOL if, after due process, it is established that his teaching effectiveness does not anymore meet satisfactory standards. For the purpose herein, 'due process' shall be understood to mean that the faculty member concerned shall be afforded the opportunity to explain his side within a reasonable time after due notification in writing." Since PSBA maintains a CBA providing retirement benefits for its employees, any amount to be received by its faculty members, namely: Mr. Rolando B. Ablanida, Mrs. Antonia R. Cailo and Ms. Pacifica Del Pilar Camba, after rendering 16 years or 15 of service and who are all 63 or 62 years of age upon retirement, shall be exempt from income tax and consequently from withholding tax as prescribed in Section 79, Chapter XIII, Title II of the Tax Code of 1997. (BIR Ruling No. DA-527-2004 dated October 11, 2004) 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. IaSCTE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue