Armed Forces and Police Mutual Benefit Association, Inc.

October 30, 2009 BIR RULING [SB-(049) 689-09] Section 32 (B) (6) (a); BIR Ruling No. 125-98 Armed Forces and Police Mutual Benefit Association, Inc. Col. Bonny Serrano cor. E. Delos Santos Avenue, Quezon City Attention: RADM Rufino S. Lopez, Jr. AFP (Ret) President & CEO Gentlemen : This refers to your letter August 13, 2009 requesting a legal opinion on whether or not the retirement benefits of two (2) retired employees should be exempt from withholding tax on compensation. DHITCc It is represented that the Armed Forces and Police Mutual Benefit Association, Inc. ("AFPMBAI"), with Taxpayer Identification No. 000-848-475-000, is a private non-stock, non-profit organization established to provide insurance and welfare benefits to its members who are members and personnel of the Armed Forces of the Philippines (AFP),Philippine National Police (PNP),Bureau of Fire Protection (BFP),Bureau of Jail Management and Penology (BJMP) and the Philippine Coast Guard (PCG);that in June 2009, two (2) of AFPMBAI's employees Mr. Alberto M. Alla and Mr. Arthur P. Somera reached the mandatory age of sixty (60) years old under the AFPMBAI Employees' Retirement Plan; that said employees have served AFPMBAI for more than 13 years; that prior to their employment with AFPMBAI, said employees have availed of their early retirement from military service and accordingly received their retirement benefits from the AFP; that consequently, the AFPMBAI subjected their retirement benefits to withholding taxes in accordance with normal retirement policies applicable to regular employees; that the retiring employees are requesting reconsideration of the withholding of taxes on their retirement benefits; that it is the contention of said employees that the retirement benefits they have previously availed of is not similar to the retirement benefits under the AFPMBAI; and that it is your opinion that the retirement benefits from AFPMBAI should be subject to withholding tax considering that tax exemption of such benefits should only be availed once. In reply, please be informed that retirement benefits are excluded from gross income subject to income tax pursuant to Section 32 (B) (6) (a) of the 1997 Tax Code, as amended, to wit: "(B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this title: xxx xxx xxx (6) Retirement Benefits, Pensions, Gratuities, etc. (a) Retirement benefits received under Republic Act No. 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: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees." (Emphasis supplied) It will be observed that under the afore-quoted provisions, retirement benefits may be received either under Republic Act (R.A.) No. 7641 or in accordance with a reasonable private benefit plan maintained by the employer under then R.A. No. 4917 (now Section 32 (B) (6) (a) of the Tax Code of 1997). Revenue Regulations No. 2-98, as amended, provides as follows: "Sec. 2.78. Withholding Tax on Compensation. xxx xxx xxx (B) Exemption from Withholding Tax on Compensation xxx xxx xxx (1) Remunerations received as an incident of Employment as follows: (a) Retirement benefits received under Republic Act 7641 and those received by official and employees of private firms, whether individual or corporate, under reasonable private benefit plan maintained by the employer which meet the following requirements: (i) The plan must be reasonable; (ii) The benefit plan must be approved by the Bureau; (iii) The retiring official or employee must have been in the service of the same for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and (iv) The retiring official or employee shall not have previously availed of the privilege under the retirement benefit plan of the same or another employer. " (Emphasis supplied) DIcSHE In BIR Ruling No. DA-198-97 dated May 5, 1997, this Office ruled that "The phrase "provided, further, that the benefits granted under this subparagraph shall be availed of by an official or employee only once" means that the retiring official or employee shall not have previously availed of the privilege under a retirement benefit plan of the same or another employer. (Sec. 1, Revenue Regulations No. 1-68)" The matter to be resolved first is whether or not the retirement benefits of Messrs. Alberto M. Alla and Arthur P. Somera were received either under R.A. 7641 or under reasonable private benefit plan maintained by their previous employer. As previously represented, Messrs. Alberto M. Alla and Arthur P. Somera have availed of early retirement from the AFP. The retirement benefits of members of the AFP come from the AFP Retirement and Separation Benefits System (AFP-RSBS). The case of Alzaga, et al. vs. Sandiganbayan, et al., (G.R. No. 169328 dated October 27, 2006) provides a brief background of the AFP-RSBS: "The AFP-RSBS was established by virtue of P.D. No. 361 (1973) in December 1973 to guarantee continuous financial support to the AFP military retirement system, as provided for in R.A. No. 340 (1948). It is similar to the Government Service Insurance System (GSIS) and the Social Security System (SSS) since it serves as the system that manages the retirement and pension funds of those in the military service. The AFP-RSBS is administered by the Chief of Staff of the AFP through a Board of Trustees and Management Group, and funded from congressional appropriations and compulsory contributions from members of the AFP; donations, gifts, legacies, bequests and others to the system; and all earnings of the system which shall not be subject to any tax whatsoever. xxx xxx xxx" Revenue Memorandum Circular No. 23-01 dated May 22, 2001 publishing Republic Act No. 9040 entitled "An Act Exempting from Tax Certain Allowances and Benefits Granted to the Members of the Armed Forces of the Philippines", approved and signed by the President on March 22, 2001, provides: "SECTION 4. Retirement Benefits, Pensions, Death and Disability Benefits. Benefits received from and enjoyed under the Armed Forces of the Philippines Retirement and Separation Benefits System (AFP-RSBS) in accordance with the provisions of Presidential Decree No. 361, as amended by Presidential Decree No. 1909, as well as death and disability benefits enjoyed by AFP personnel as provided by law, shall likewise be exempted from any tax of whatever nature." EDCIcH The nature of benefits arising from AFP-RSBS was confirmed in BIR Ruling No. DA-177-02 dated October 2, 2002, thus: "Considering that AFP-RSBS is an employee's trust fund established under P.D. 361, as amended by PD 1656 for the exclusive benefit of all the military members or commission officers and enlisted personnel of the Armed Forces of the Philippines and the corpus or income of the fund is not used for or diverted to purposes other than for the exclusive benefit of the military members or commission officers and enlisted personnel of the AFP and their beneficiaries, this Office maintains its position that the AFP-RSBS is still considered an employees' trust and therefore income of the trust fund from its investments remain exempt from income tax and consequently from withholding tax pursuant to Section 60(B) of the Tax Code of 1997. (BIR Ruling No. DA-673-99 dated December 12, 1999)" (Emphasis supplied) Hence, it appears then that the retirement benefits received by Messrs. Alberto M. Alla and Arthur P. Somera as members of the AFP were neither pursuant to R.A. 7641 nor from a reasonable private benefit plan. This Office, in BIR Ruling No. 125-98 dated September 4, 1998, was of the opinion that if the individual received retirement benefits from GSIS and subsequently qualifies for retirement benefits from his private employer, said retirement benefits received from the private employer are exempt from withholding tax, thus "In reply thereto, please be informed that retirement benefits under a qualified private benefit plan within the contemplation of Section 32(B)(6)(a) of the Tax Code of 1997 (then Section 28(b)(7)(A) of the Tax Code of 1977) or under Republic Act No. 7641, shall not be included in gross income and shall be exempt from income tax and consequently from the withholding tax prescribed in Section 79, Chapter XIII, Title II of the Tax Code of 1997 (then Section 72 of the Tax Code, as amended and as implemented by Revenue Regulations No. 6-82 as amended). However, under Section 32(B)(6)(a) of the Tax Code of 1997 (then Section 28(b)(7)(A) of the Tax Code of 1977 as implemented by Revenue Regulations No. 1-68; as amended) in order to avail of the exemption with respect to retirement benefits, the following requirements must be met: (a) the plan must have been submitted to the BIR for determination of qualification as a reasonable retirement benefit plan; (b) the retiring official or employee must have been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of retirement; and (c) the retiring official or employee shall not have previously availed of the privilege under a retirement benefit plan of the same or another employer. The phrase "shall not have previously availed of the privilege under a retirement benefit plan of the same or another employer" means that the retiring official or employee must not have previously received retirement benefits from the same or another employer who have a qualified retirement benefit plan under Section 32(B)(6)(a) of the Tax Code of 1997. Such being the case, and since the retirement benefits/gratuities which you received in 1990 was from the GSIS and not from the same or another employer who have a qualified private retirement plan under Section 32(B)(6)(a) of the Tax Code of 1997 (then Section 28(b)(7)(A) of the Tax Code of 1977),your retirement benefits to be received from the Lyceum of the Philippines, under Section 32(B)(6)(a) of the Tax Code of 1997 shall be exempt from income tax and consequently from the withholding tax prescribed in Section 79, Chapter XIII, Title II of the Tax Code of 1997, (then Section 72 of the Tax Code, as amended and as implemented by Revenue Regulations No. 6-82 as amended)." (Emphasis supplied) Based on the foregoing, this Office is of the opinion and hereby holds that the retirement benefits of Messrs. Alberto M. Alla and Arthur P. Somera from AFPMBAI Employees' Retirement Plan are exempt from income tax and consequently from withholding tax since the retirement benefits previously received by them were from the AFP-RSBS which is not from the same or another employer who has a qualified private retirement plan under Section 32 (B) (6) (a) of the Tax Code of 1997. HADTEC Accordingly, amount of taxes withheld from the retirement benefits of Messrs. Alberto M. Alla and Arthur P. Somera should be refunded to them. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service