BIR Ruling No. 286-14

July 9, 2014 BIR RULING NO. 286-14 Section 32 (B) (6) (a), NIRC of 1997, as amended; BIR Ruling No. 167-2012; BIR Ruling No. 199-2011; BIR Ruling No. 171-2011; BIR Ruling No. 167-2012; BIR Ruling No. 163-2011 Isetann Department Store, Inc. C. M. Recto Avenue corner Evangelista Street, and Quezon Boulevard, Quiapo, Manila Attention: Mr. Eddie O. Go Accounting Manager Gentlemen: This refers to your letter dated October 1, 2013, requesting exemption from the payment of withholding tax on the retirement benefits of your retiring employees, namely: MESSRS. GERARDO D. CRUZ and JOSEFINO P. VILLACORTA, pursuant to a Collective Bargaining Agreement (CBA). It is represented that MR. GERARDO D. CRUZ, a resident of No. 2653 Severino Reyes Street, Sta. Cruz, Manila and with Taxpayer Identification No. (TIN) 104-432-259, is an employee of ISETANN DEPARTMENT STORE, with regular status as Stocker of Traffic Department from August 25, 1984 up to the present. He will retire on March 1, 2014. It is likewise represented that MR. JOSEFINO P. VILLACORTA, a resident of No. 1627 Instruccion Street, Sampaloc, Manila and with Taxpayer Identification No. (TIN) 122-573-656, is an employee of ISETANN DEPARTMENT STORE, INC. with regular status as a Receiving Clerk of Traffic Department from July 14, 1986 up to the present. He will retire on August 15, 2014. It is further represented that ISETANN DEPARTMENT STORE, INC., with principal office address at Isetann Cinerama Complex, C. M. Recto Avenue corner Quezon Boulevard, Quiapo, Manila, is a corporation duly organized and existing under the laws of the Republic of the Philippines, with BIR Taxpayer Identification No. 000-083-602-000 and Certificate of Registration No. OCN1RC0000076968 dated November 29, 1979, and the NAGKAKAISANG MANGGAGAWA NG ISETANN (NMI), with principal office address at No. 600 Carriedo Street, Sta. Cruz, Manila, is a legitimate labor union duly registered with the Department of Labor and Employment with Serial No. NCR-UR-3-1646-96, entered into a Collective Bargaining Agreement (CBA), Section 13 of which provides, to wit: TAacIE "Section 13. Retirement Pay. The Company agrees to give retirement pay pursuant to existing laws." In support of the request, the following documents were submitted by ISETANN DEPARTMENT STORE, INC.: 1) BIR Certificate of Registration of ISETANN DEPARTMENT STORE, INC. 2) A copy of its Annual Income Tax Return for the year 2012; 3) A copy of its SEC Amended Articles of Incorporation; 4) A copy of the Certificate of Registration of Nagkakaisang Manggagawa Ng Isetann (NMI) with the Department of Labor and Employment (DOLE); 5) Certifications that MESSRS. GERARDO C. CRUZ and JOSEFINO P. VILLACORTA are bona fide employees of Isetann Department Store, Inc.; and 6) A copy of the Collective Bargaining Agreement (CBA) between Isetann Department Store, Inc. and Nagkakaisang Manggagawa Ng Isetann (NMI). In reply, 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) 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, MESSRS. GERARDO C. CRUZ and JOSEFINO P. VILLACORTA may retire upon reaching the retirement age as provided for in R.A. 7641. Thus, any retirement benefits received pursuant to the Act is exempt from income tax and consequently, from the withholding tax as prescribed in Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended. (BIR Ruling No. 163-2011 dated May 23, 2011) HcACST Moreover, pursuant to Section 2.78.1 of Revenue Regulations No. 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 Revenue Regulations No. 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