Enrique P. Dutong

August 24, 2009 BIR RULING [SB-(034) 512-09] Section 32 (B) (6) (a); BIR RULING [DA-014-08] Enrique P. Dutong Leonardo H. Garcia, Jr. Romeo P. Rublico Arthur L. Sunga Gentlemen : This refers to the letter dated July 20, 2009 requesting, in effect, for legal opinion on exemption from the payment of withholding tax on retirement/separation benefits. It is represented that ENRIQUE P. DUTONG, LEONARDO H. GARCIA, JR., ROMEO P. RUBLICO, AND ARTHUR L. SUNGA have been employed by GLOBESCO, INC. Upon completion of twenty three (23) years of service, they were automatically/compulsory retired on June 30, 2009 in accordance with Section 5 of Article XI of the collective bargaining agreement between GLOBESCO, INC. and GLOBESCO FREE WORKERS UNION: "Section 5. It is agreed between the parties that workers covered by this agreement shall be automatically or compulsory retired from work by the Company upon reaching sixty (60) years of age or upon completion of twenty three (23) years of continuous service to the Company. Said employee shall be paid the equivalent of thirty three (33) days basic pay for every year of service based on his current basic rate of pay." 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." AaEDcS Accordingly, retirement benefits received under Republic Act (R.A.) 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 private sector employees under Section 32 (B) (6) (a) of the Tax Code of 1997 are exempt from income tax provided that their employers maintain a qualified retirement benefit plan duly approved by the BIR. Section 1 of R.A. No. 7641, otherwise known as an "Act Amending Article 287 of 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: 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, R.A. No. 7641 will apply only in the absence of any retirement plan, collective bargaining agreement or other applicable employment contract in the establishment. Under the said Act, 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. DHATcE Under Section 32 (B) (6) (a) of the Tax Code of 1997, the employee must have rendered ten (10) years of service to the company; and 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. It appears that GLOBESCO, INC. maintains a collective bargaining agreement providing for retirement benefits of its employees. Accordingly, ENRIQUE P. DUTONG, LEONARDO H. GARCIA, JR., ROMEO P. RUBLICO, AND ARTHUR L. SUNGA may be retired upon reaching the retirement age established in the CBA. Thus, any retirement benefits received pursuant to the CBA is 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. DA-527-2004 dated October 11, 2004). 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service