Mr. Edito F. Bacod

October 15, 2009 BIR RULING [SB-(046) 648-09] Section 32 (B) (6) (a); SB(034) 512-2009 Mr. Edito F. Bacod No. 91 Kagawad Road, Area B Batasan Hills, Quezon City Sir : This refers to your letter dated September 17, 2009 requesting, in effect, for exemption from the payment of withholding tax on retirement/separation benefits. caADIC It is represented that you have been employed by Globesco, Inc. Upon completion of twenty three (23) years of service, you were automatically/compulsory retired on September 1, 2009 in accordance with Section 5 of Article XI of the collective bargaining agreement (CBA) 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, 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." DASCIc 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. IDcHCS 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." 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. [BIR Ruling No. DA-527-2004 dated October 11, 2004 citing BIR Ruling No. 052-00 dated October 30, 2000, & BIR Ruling No. SB (041) 603-09 dated September 22, 2009] In the case of Globesco, Inc., its CBA, providing for retirement benefits of its employees, automatically retires its employees upon reaching twenty-three (23) years in service. This condition in the CBA, consequently, allows retirement of employees even before attaining the minimum requirement age of fifty (50) years old as provided for under Section 32 (B) (6) (a) of the Tax Code of 1997, as amended. Thus, following the rule that the CBA is deemed the law between the parties, and that the agreed age of retirement thereof shall become the basis in determining the taxability of retirement benefits of the retiring employees, any retirement benefits received by the retiring employees of Globesco, Inc. pursuant to the CBA it maintains, therefore, 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, as amended. Accordingly, even if you were below fifty (50) years of age at the time you retired from Globesco, Inc., since you retired in accordance with the condition provided under its CBA, the retirement benefits you will received, therefore, shall not 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. 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. CSaITD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service