BIR Ruling No. 442-12

July 3, 2012 BIR RULING NO. 442-12 Section 32 (B) (6) (a) of the Tax Code of 1997, as amended; BIR Ruling No. 177-2011; BIR Ruling No. 199-2011 Goodyear Steel Pipe Employees Union- Association of Genuine Labor Organizations 128 Quirino Hi-way Baesa, Quezon City Gentlemen : This refers to the letter of ASSOCIATION OF GENUINE LABOR ORGANIZATIONS dated April 25, 2012, requesting for exemption from the payment of withholding tax on retirement benefits of the retired employee pursuant to a Collective Bargaining Agreement (CBA). It is represented that the following applicant-union members were hired by Good Year Steel Pipe Corporation, a domestic corporation with tax identification number 000-372-831-000, as follows: Name Date Hired Date Retired Date of Birth Pedro Haban June 1975 November 24, 2011 November 25, 1951 Narciso Lazano February 1972 June 30, 2011 October 21, 1950 Guillermo Lonsame June 1974 October 26, 2011 September 25, 1951 Amado Dacula July 1974 December 23, 2011 November 25, 1951 Honorio Fajardo January 1979 November 26, 2011 November 26, 1951 It is further represented that Good Year Steel Pipe Corporation and Good Year Steel Pipe Corporation-Association of Genuine Labor Organizations (GSPEUI-AGLO) entered into a CBA, Section 1 of Article XVII of which provides, to wit: "ARTICLE XVII RETIREMENT BENEFITS Section 1. Retirement Pay. The COMPANY agrees to grant optional retirement to all covered employees up to three (3) employees per year. The retirement pay shall be based on the current rate at the time of retirement computed at thirty (3) n days per year of service. Senior Citizen shall be given priority in the grant of this benefit. This provision shall be deemed as compliance with R.A. No. 7641." 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 1 shall not be included in gross income and shall be exempt from income tax effective January 1, 1998. TCDHIc 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. Since Good Year Steel Pipe Corporation maintains a CBA providing retirement benefits for its employees, any amount to be received by its retired employees 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. 177-11 dated May 27, 2011) 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. (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 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 Footnotes 1. "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." n Note from the Publisher: Copied verbatim from the official document. Discrepancy between the word and figure.