BIR Ruling [UN-389-95]

November 6, 1995 BIR RULING [UN-389-95] Far East Bank & Trust Company Muralla, Intramuros, Manila Attention: Atty . Rodolfo B . Fernandez Vice President Gentlemen : This refers to your letter dated July 1, 1995 requesting, in effect, for a ruling on the qualification under Republic Act No. 4917 (now Section 28(b)(7)(A) of the Tax Code, as amended) of the attached draft of a Retirement Plan (hereinafter referred to as the Retirement Plan) which your bank will uniformly apply to employers who desire to comply with Republic Act No. 7641 requiring the payment of retirement benefit to qualified private sector employees whose employers do not maintain BIR qualified/accredited retirement benefit plan within the contemplation of Section 28(b)(7)(A) of the Tax Code, as amended, so that the retirement benefits to be received by the employees under R.A. 7641 shall also be exempt from income tax. cdta In reply, please be informed that Republic Act No 7641 does not provide for the tax exemption of the retirement benefit to be received by the private sector employees. It merely provides that 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 as the compulsory retirement age, and 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. (Sec. 1 Ibid) However, considering that, as represented, the Retirement Plan has the following features: "a) The Plan is reasonable, based as it is on the benefit structure of R.A.7641; "b) It extends tax-free benefit only to those who 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; "c) The Plan is a permanent and continuing program, unless sooner terminated by virtue of a valid business reason; "d) The Plan covers all employees and is non-discriminatory, covering all regardless of their position, designation or status and irrespective of the method by which their wages are paid; "e) The Plan is non-contributory; "f) There is impossibility of diversion; "g) In line with Republic ActNo.7641, right vests only on retirement dates; "h) The Fund is administrative by a trust." the same qualifies as a reasonable retirement benefit plan within the contemplation of Section 28(b)(7)(A) of the Tax Code and as such, it shall be entitled to the following benefits and privileges, viz.: 1. The retirement benefits to be received by the member-employees shall be exempt from all taxes [Sec. 28(b)(7)(A), Tax Code]; 2. The income of the Trust Fund from its investments are exempt from income tax [Sec. 53 (b), Tax Code]; and 3. The contributions of the company to the retirement fund are deductible from its gross income [Sec. 29(a)(1)(A), Tax Code]. It is understood in this connection, that the Retirement Plan should be submitted to this Office for determination of its qualification under Section 28(b)(7)(A) of the Tax Code, as amended and as implemented by Revenue Regulations Nos. 1-68 and 1-83. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)