BIR Ruling No. 297-12

May 3, 2012 BIR RULING NO. 297-12 Tax Code of 1997, as amended, Section 32 (B) (6) (a); BIR Ruling No. 163-2011; 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 February 8, 2012, requesting certificate of tax exemption on the retirement benefits of your employees namely, Ms. Dolores T. Chan and Ms. Ellen S. Go . Documents submitted disclosed that the above-named employees are presently employed by Isetann Department Store, Inc.;that Ms. Dolores T. Chan holds the position of Finance Manager of the Finance Department since March 6, 1979 and is due for retirement on April 30, 2012, approximately thirty three (33) years in the service of the company, while Ms. Ellen S. Go holds the position of Company Officer of the Supermarket Merchandising Department from July 1, 1997 and is due to retire on July 15, 2012, approximately fifteen (15) years in service; that the above-named employees, who are part of the managerial personnel of Isetann Department Store, Inc.,will be reaching the age of sixty (60) at the time of their retirement; and that the company has no retirement plan or collective bargaining agreement that would cover the retirement benefits of the said employees. 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 Republic Act No. 7641 shall not be included in the gross income of the retiring employee and therefore not forming part of his 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. Based on the foregoing and since at the time of retirement of the above-named employees, they will be reaching the age of sixty (60) and rendering at least five (5) years of service in the company, the retirement benefits they will receive pursuant to R.A. 7641 are not subject to income tax and consequently to the withholding tax imposed under Section 79, Chapter XIII, Title II of the Tax Code of 1997. (BIR Ruling No. 163-2011 dated May 23, 2011) DaScAI 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. It is understood that this exemption does not include the payment to the employees of their salaries and the payment of the 13th month pay and other benefits in excess of the Php30,000 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