BIR Ruling No. 635-12

November 26, 2012 BIR RULING NO. 635-12 Section 32 (B) (6) (a) NIRC of 1997; RA No. 7641; BIR Ruling No. 177-11 Blandino A. Ocbian 113 Aracity Avenue, Tinijares, Malabon City Dear Mr. Ocbian, This refers to your letter dated July 14, 2010 requesting for legal opinion on the taxability of your separation pay received in accordance to Article XVI of the Collective Bargaining Agreement between Reno Foods, Inc. and Samahan ng Manggagawa sa Reno Foods, Inc.-Independent on Early Retirement. ScHADI It is represented that you have been employed by RENO FOODS, INC., a corporation duly organized and existing under and by virtue of the laws of the Philippines; and that at fifty-seven (57) years old and after serving that company for thirty eight (38) years and ten (10) months, you availed an optional retirement on July 9, 2010 pursuant to Article XVI (Resignation Pay and Retirement Pay) of the Collective Bargaining Agreement between RENO FOODS, INC. and Samahan ng Manggagawa sa Reno Foods, Inc.-Independent , Section 4 of which provides, to wit: "Section 4. Early Retirement. An employee upon reaching the age of at least fifty five (55) and had served the company for at least ten (10) years may avail of this optional retirement and shall receive a separation pay of twenty four (24) days salary for every year of service rendered, a fraction of at least six (6) months is equivalent to one (1) whole year. It is further agreed that this can only be availed once." In reply, please be informed that Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, 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 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 (RA) No. 7641 shall not be included in gross income and shall be exempt from income tax effective January 1, 1998. On the other hand, the retirement benefits to be received by the private sector employees under Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, are exempt from income tax provided that their employers maintain a qualified retirement benefit plan duly approved by the BIR. Section 1 of RA No. 7641, otherwise known as an "Act Amending Article 287 of the Presidential Decree No. 442, as amended, otherwise known as 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" provides, 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: IHEaAc 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." Based on the foregoing, RA 7641 will apply when an employee retires upon reaching the retirement age established in the Collective Bargaining Agreement. In the absence of any retirement plan, Collective Bargaining Agreement 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 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. It appears that RENO FOODS, INC. maintains a Collective Bargaining Agreement providing for retirement benefits of its employees. Thus, any amount that you may have received upon reaching at least fifty-five (55) years old and after rendering at least ten (10) years of service, shall be exempt from income tax and consequently, from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, (BIR Ruling No. 177-11 dated May 27, 2011). However, other benefits provided in the Collective Bargaining Agreement, if there are any, other than retirement benefits shall not be covered by the tax exemption unless they are also expressly exempt from tax pursuant to the other provisions of the Tax Code. It is, however, understood that this exemption does not include the payment of the resigned/retired 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. Moreover, pursuant to Section 2.78.1 (A) (7) 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. 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. cACEaI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue