Cacho Hermanos, Inc.

September 22, 2009 BIR RULING [SB-(041) 603-09] 32 (B) (6) (a); 79; DA-527-2004; 052-00 Cacho Hermanos, Inc. Pines cor. Union Sts., Mandaluyong City Attention: Ms. Ma. Norita L. Santiago Chief Accountant Gentlemen : This refers to your letter dated February 25, 2009 requesting, in effect, for legal opinion on exemption from the payment of withholding tax on retirement benefits received by your employees in accordance with the company's collective bargaining agreement (CBA). As represented, at least four (4) of your employees are retiring from service, namely: 1) Mario C. Ramos 2) Ramon L. Cruz 3) Herminiano N. Epan 4) Sofio S. Mortel Cacho Hermanos, Inc. does not maintain any private benefit plan for its employees. However, it has a CBA providing for retirement benefits for its employees, the pertinent portion of which provides, viz. : "Any employee has the option to retire upon reaching seventeen (17) years of continuous service to the company. An employee who reaches seventeen (17) years of continuous service shall be entitled to an optional retirement pay in the amount of fifteen (15) days basic pay per year of service. HSAcaE xxx xxx xxx An employee who reaches twenty (20) shall be entitled to an optional retirement pay in the amount of seventeen (17) days basic salary for every year of service in accordance with the provisions of R.A. 7641 provided he meets all the qualifications required in the said Republic Act." 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 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." On the other hand, 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." aDcETC Under R.A. No. 7641, the actual retirement age may even be lower than fifty (50) years of age, but since the CBA or other applicable employment contract is deemed the law between the parties, the agreed age of retirement shall become the basis in determining the taxability of retirement benefits of the retiring employees. Thus, for purposes of determining the taxability of retirement benefits received by retiring employees, the retirement age is that age established in the CBA or other applicable employment contract. However, if the CBA or other applicable employment contract does not provide for a retirement age, the minimum age requirement of fifty (50) years provided under Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, shall apply in order to qualify for the exemption granted therein. The Bureau in BIR Ruling No. 052-00 dated October 30, 2000 interpreted the pertinent provision of Section 32 as follows: "There can be no uncertainty that the purpose of the above-quoted provision is to exclude the retirement benefits from income tax. The first clause of Section 32 Stated so in plain language. The sole object of the two (2) conditions enumerated is in turn unmistakably to provide merely for the minimum requirement in order that the retirement benefits to be given to the official or employee may be exempt from income tax and consequently from withholding tax. " (Italics provided) In the case of Cacho Hermanos, Inc., although it maintains a CBA providing for retirement benefits of its employees, the said CBA, however, does not provide for retirement age. Thus, any retirement benefits received by the retiring employees of Cacho Hermanos, Inc. pursuant to the CBA it maintains shall be exempt only from income tax and consequently, from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended, if the two (2) conditions/minimum requirements set forth under Section 32 (B) (6) (a) of the same Tax Code are complied. (BIR Ruling No. DA-527-2004 dated October 11, 2004 citing BIR Ruling No. 052-00, supra .) Undoubtedly, the minimum ten-year requirement as to the length of service provided under Section 32 (B) (6) (a) of the Tax Code is complied under the terms of the CBA of Cacho Hermanos, Inc. Thus, leaving for determination the retirement age of each retirees, for purposes of qualification for exemption of the retirement benefits received by them in accordance with Section 32 (B) (6) (a) of the Tax Code. Accordingly, if the age of the retiring employee is below fifty (50) years, the retirement benefit he/she will received shall be subject to income tax and consequently, to the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended. HCTEDa On the other hand, in case of claims for refund by those employees whose retirement benefits were already deducted or subjected to the withholding tax despite qualification under the provision of Section 32 (B) (6) (a) of the Tax Code, Cacho Hermanos, Inc. shall have the obligation to refund the withholding tax deducted from the retirement benefits of the affected employees if the said tax has not yet been remitted to the BIR. Otherwise, any claim for refund of taxes withheld from retirement benefits should be filed with the concerned Revenue District Office/BIR Office where the taxpayer is registered or required to be registered pursuant to Unnumbered Memoranda dated July 26, 2000 and August 15, 2001 and Revenue Delegation Authority Order (RDAO) No. 3-2002 dated February 15, 2002. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service