Ms. Carmencita L. Ramos

December 18, 2009 BIR RULING [SB-(054) 798-09] 32 (B) (6) (a); 050-98; DA-014-01; DA-156-03; DA-244-03; SB-057-2000 Ms. Carmencita L. Ramos c/o Philippine Electricity Market Corporation 9/F Robinson's Equitable Tower ADB Avenue, Ortigas Center, Pasig City Madam : This refers to your letter dated December 2, 2009 requesting for an opinion on whether or not the retirement benefits of Carmencita L. Ramos is subject to withholding tax. It appears that Carmencita L. Ramos is employed by the Philippine Electricity Market Corporation (PEMC), a private corporation registered with the Securities and Exchange Commission (SEC). She had reached the mandatory retirement age of 65 year old and was due to retire on December 31, 2009. She served the company for more than five (5) years from November 1, 2004 to December 31, 2009. Since PEMC is not maintaining a reasonable private benefit plan approved by the Bureau of Internal Revenue (BIR) nor was there a Collective Bargaining Agreement (CBA) providing for retirement benefits of its employees, the management granted and approved the payment of Ms. Ramos' retirement benefits in accordance with the provisions of Republic Act (RA) No. 7641, otherwise known as the Retirement Law. However, when the actual payment was made, a tax of P148,680.00 was deducted and withheld from her approved retirement benefit of P646,625.00 and were given only the net of P315,945.00. In reply thereto, please be informed that Section 32 (B) (6) (a) of the Tax Code of 1997 provides that retirement benefits received under RA 7641 shall be excluded from gross income. ATEHDc Section 1 of RA No. 7641, otherwise known as an Act amending Article 287 of Presidential Decree (PD) 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 PD 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 benefits 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) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said 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 whole year. xxx xxx xxx" Thus, since PEMC has no retirement plan duly approved by the BIR nor an employment contract with its employees providing for retirement age, its employees may retire under RA 7641 upon reaching the age of 60 years or more but not beyond 65 years which is declared as the compulsory retirement age who has served at least 5 years in the establishment. (BIR Ruling No. DA-244-03 dated July 25, 2003) Accordingly, the retirement benefits of Carmencita L. Ramos who had retired from the service after reaching the age of 65 and have rendered 5 years of service shall be exempt from income tax and consequently from withholding tax prescribed under Section 79; Chapter XIII, Title II of the Tax Code of 1997. (BIR Ruling No. 050-98 dated April 27, 1998) The payment of the 13th month pay and other benefits in excess of the Thirty Thousand Pesos (P30,000.00) threshold, and the salary you received, however, is subject to income tax and consequently to withholding tax. 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 as null and void. ACcTDS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service