BIR Ruling No. 405-15

December 14, 2015 BIR RULING NO. 405-15 Tax Code of 1997, as amended, Section 32 (B) (6) (a); BIR Ruling No. 154-2013 BIR Multi-Purpose Cooperative G/F DPC Bldg., BIR Complex Diliman, Quezon City Attention: Norma L. Lipana General Manager Gentlemen : This refers to your letter dated February 3, 2015, requesting on behalf of Ms. Aurora E. Morada ( "Ms. Morada ") for a certificate of tax exemption on the latter's retirement benefits received from BIR Multi-Purpose Cooperative (BIR-MPC) . It is represented that Ms. Morada , with Tax Identification Number 101-694-234, had been under the employment of BIR Multi-Purpose Cooperative for thirty five (35) years which ended on January 8, 2015 when she retired after reaching the age of sixty-five (65) years old; that Ms. Morada was given retirement benefits in the amount of Two Hundred Sixty Nine Thousand Two Hundred Twenty Pesos (PhP269,220.00) in accordance with Article 287, Title II of the Labor Code of the Philippines; and that Ms. Morada has not previously availed of the privilege under the retirement plan of another employer. In reply, please be informed that under Section 1 of Republic Act (R.A.) No. 7641, amending 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," it is provided, viz. : "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. . . . 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 hereby declared the compulsory retirement age, who has served at least five (5) years in the said 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 whole year ." (Underscoring supplied) cHDAIS On the taxability of the above retirement benefits, Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, states, thus: "Section 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (6) Retirement Benefits, Pensions, Gratuities, etc. (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 ." (underscoring supplied) Accordingly, since the retirement benefits of Ms. Morada were given in accordance with R.A. 7641, and since Ms. Morada has reached the age of sixty-five (65) and rendered thirty-five (35) years of service at the time of her retirement, her retirement benefits shall be exempt from income tax, and consequently from withholding tax imposed under Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended. (BIR Ruling No. 154-13 dated April 29, 2013) However, pursuant to Section 2.78.1 (A) (7) of Revenue Regulations (RR) 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. 154-13 dated April 29, 2013) It must be understood that the payment to Ms. Morada of her salaries and the payment of the 13th month pay and other benefits in excess of the PhP82,000 1 threshold shall be subject to income tax, and consequently to withholding tax, under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. ISHCcT 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. Republic Act (R.A.) No. 10653, "An Act Adjusting the 13th Month Pay and other Benefits Ceiling Excluded from the Computation of Gross Income for Purposes of Income Taxation, Amending for the Purpose Section 32 (B), Chapter VI of the National Internal Revenue Code of 1997, as Amended." R.A. No. 10653 is being implemented by Revenue Regulations No. 3-2015. The amount of P82,000 shall apply to the 13th month pay and other benefits paid or accrued beginning January 1, 2015.