Philippine Airlines

December 23, 2009 BIR RULING [SB-(056) 827-09] 32 (B) (6) (a); DA-206-03 Philippine Airlines Post Office Box 1955 Manila, Philippines Attention: Ms. Annette Y. Domingo Manager, Administrative Payroll Treasury Department Gentlemen : This refers to your undated letter seeking clarification on the taxability of your employees' benefits at the mandatory age of 65 as herein described: 1. Employee 1 1st Separation Age at the time of separation 55 years old Reason Special Separation Program Date Employed February 1, 1967 Date Separated March 15, 1999 Years of Service 31.75 2nd Separation Age 65 years old Reason Mandatory Retirement Date rehired/Employed April 1, 1999 Date Separated February 1, 2009 Years of Service 9.84 Cumulative Years of Service 41.59 2. Employee 2 1st Separation Age of Separation 56 years old Reason Spin off Date Employed August 25, 1965 Date Separated September 1, 2000 Years of Service 34.92 2nd Separation Age 65 years old Reason for Separation Mandatory Retirement Date Rehired/Employed September 1, 2000 Date Separated March 1, 2009 Years of Service 8.50 Cumulative Years of Service 43.42 Background: In 1998, Philippine Airlines, Inc. (PAL) filed a petition with the Securities and Exchange Commission for the approval of a Rehabilitation Plan due to among others, the continuing financial losses from operations, severe pressure on the company's cash flows and financial difficulties for which a quasi reorganization was approved (by the SEC) in 1999. These reorganization & financial losses/difficulties resulted in the grant of a special separation program and spin-off of some of PAL's operating departments. Given these company condition, retrenchment of employees thus resulted. Separation benefits were given to retrenched employees. However, some of the employees retrenched were vital in the company's operation and thus were rehired. DaTICc Facts: PAL has a Bureau of Internal Revenue (BIR) approved retirement plan. The plan provides for the mandatory retirement of employees at age 65. Issue: Whether or not the retirement benefits received by the re-hired PAL employees at the mandatory retirement age of 65 on the second separation is subject to tax. In reply thereto, please be informed that Section 32 (B) (6) (a) of the Tax Code of 1997 provides that "(a) Retirement benefits received under R.A. 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. . . . shall not be included in gross income and shall be exempt from taxation." 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. However, there is nothing in the said provision which requires that the ten (10) years to be rendered by the employee should be continuous, it is enough that the same is rendered to one and the same employer, if at all. In applying the afore-quoted provision to the instant case, it is clear that Leticia Custodio, Nicasio Gabriel, Mariano Meneses, Zenaida San Gabriel and Carlos Bandalan who have rendered more than ten (10) years of service and are at least fifty (50) years of age are covered by the said law. Accordingly, the retirement benefits to be paid to them by PAL are exempt from income tax and consequently from withholding tax. 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service