BIR Ruling No. 411-12

June 15, 2012 BIR RULING NO. 411-12 Sec. 32 (B) (6) (a) NIRC; BIR Ruling No. ERP-23-2011; BIR Ruling No. 36-10 Pedrito S. Consebido c/o Servo Aerotrade Services, Inc. 203 ERLAG Bldg., 102 Esteban St. Legaspi Village, Makati City Sir : This refers to your letter dated January 31, 2012 requesting exemption from payment of income tax on your retirement benefits received in accordance with the employees' retirement plan of your employer, Servo Aerotrade Services, Inc. pursuant to Section 32 (B) (6) (a) of the Tax Code of 1997. It is shown that Servo Aerotrade Services, Inc. established a retirement plan for its employees pursuant to Republic Act No. 4917 and appointed China Bank-Trust Group as the trustee of the retirement fund. Article V, Section 1 of the Plan provides that the normal retirement date of a member shall be the first day of the month coincident with or next following his sixtieth (60th) birthday provided he has served the company for at least five (5) years of service. On the other hand, Section 2 of the same Article allows the late retirement of an employee upon permission of the Company on a case by case and yearly extension basis. In accordance with Section 2, Article V of the Plan, Mr. Pedrito Consebido availed of the late retirement after having completed eighteen (18) years of service in the company at the age of sixty (60) years old, as attested to by Teresita P. Limgenco, President of Servo Aerotrade Services, Inc. In reply thereto, please be informed that Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, requires that in order for the employee's retirement benefits, received in accordance with a reasonable retirement plan, may be granted tax exemption, the following conditions must concur: (1) the employee had been in the service of the same private firm for at least ten (10) years; and (2) he is at least fifty (50) years old at the time of retirement. Applying the foregoing in the instant case, it is shown that Mr. Pedrito Consebido was able to comply with the two (2) conditions above. He has rendered eighteen (18) years of service in the company and is sixty (60) years old at the time of his retirement. Thus, the retirement benefits which he shall receive from Servo Aerotrade Services, Inc. shall be exempt from income tax, and consequently, from withholding tax, pursuant to Section 32 (B) (6) (a) of the Tax Code of 1997, as amended. (BIR Ruling No. ERP-23-2011 dated November 10, 2011) Moreover, pursuant to Sections 2.78.1 (A) (3) and (7) of 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, is not subject to income tax and consequently to the withholding tax. Conversely, the cash equivalent of vacation leave credits 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. Finally, the tax exemption does not include the company's payment of Mr. Pedrito Consebido's salary. (BIR Ruling No. 36-10 dated August 27, 2010) 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 as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue