March 31, 2004

BIR RULING [DA-151-04]

Padilla Law Office
7/F Padilla-De Los Reyes Building
232 Juan Luna, Luna Street
Binondo, Manila
Attention: Atty. Sabino Padilla, Jr.
Gentlemen :
This refers to your letters dated May 23, 2003 and February 17, 2004
requesting for clarificatory ruling on the following facts:
"6. In the light of the foregoing background, several employees of
GCHS since January 1, 1998 (when the 1997 NIRC took effect) have been
compulsorily retired after twenty (20) years of service, pursuant to Section 1,
Article X of the GCHS Retirement Plan quoted above. These retirees, however,
have not reached age fifty (50). The question squarely raised is whether their
retirement benefits are subject to withholding.
"It is our opinion that since R.A. No. 7641 provides that "any employee
may be retired upon reaching the retirement age established in the collective
bargaining agreement or other applicable employment contract," and the GCHS
Retirement Plan is part of the terms and conditions of employment of GCHS
employees and therefore an "applicable employment contract", and a GCHS
employee may be compulsorily retired after completing 20 years of service, even
if he is not yet fifty (50) years old at the time of retirement. Similarly, a GCHS
employee may be compulsorily, retired upon reaching sixty (60) years, even if
he has not served for at least ten (10) years.
"And since both have met the two requirements of R.A. No. 7641 which
give them a right to the retirement benefit, namely, (a) that he is retired
according to the CBA or other applicable employment contract, and (b) that he
"has served at least five (5) years in the said establishment" their retirement
benefits are not subject to income tax pursuant to Section 32(B)(6)(a) of the Tax
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Code. And this exemption applies, even if R.A. No. 4917, under which the
GCHS Retirement Plan was established, requires at least ten years of service
and age fifty for the tax exemption of retirement benefits.
"We request a confirmation of the following opinion, because of the
growing confusion among banks as to whether it is the conditions of R.A. No.
7641 or R.A. No. 4917 that would apply to the two cases explained above."

In reply thereto, please be informed that Section 32(B)(6)(a) of the Tax Code
of 1997 provides as follows:
"(6) Retirement Benefits, Pensions, Gratuities, etc.
"(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: Provided, further, that the benefits
granted under this subparagraph shall be availed of by an official or employee
only once. . . . ."

It will be observed that under the afore-quoted provisions, retirement benefits

may be received either under R.A. No. 7641 and 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.
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
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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."

Thus, R.A. No. 7641 providing for Retirement Pay to Qualified Private Sector
Employees shall apply only in the absence of any Retirement Plan, collective
bargaining agreement or other applicable employment contract in the establishment.
Accordingly, under RA 7641, an employee upon reaching the age of sixty (60) years
or more, but not beyond sixty-five (65) years which is 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.
Under R.A. No. 4917 [now Section 32(B)(6)(a) of the Tax Code of 1997], it is
required that the following conditions must be present in order that the employee
benefits may be granted tax exemptions: (1) the employee had been in the service of
the same private firm for at least ten (10) years; and (2) he is at least fifty (50) years
old at the time of retirement.
Thus, if there is a retirement plan duly approved by the BIR, collective
bargaining agreement or other applicable employment contract providing for
retirement benefits, the same shall be followed and R.A. No. 7641 shall not apply.
In your letter dated February 17, 2004, you opined that the tax exemption under
R.A. No. 7641 and the tax exemption under R.A. No. 4917 must be reconciled and
harmonized in a way that would not lead to such absurd results as:
1.

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An employer who sets up a reasonable private benefit plan, but

does not secure B.I.R. approval, will have all retirement benefits
subject to tax, even if the retiree is 50 years old and has served 10
years. The retiree cannot qualify under R.A. No. 4917 because his
employer's retirement plan is not approved by the B.I.R. Neither
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can be qualify under R.A. No. 7641 because it applies only "in the
absence of a retirement plan or agreement providing for retirement
benefits"; here there is a retirement plan, although not approved by
the B.I.R., or
2.

An employer enters into a collective bargaining agreement

providing retirement benefits to employees who complete twenty
years of service even if below age 50, or to employees who reach
age 60, provided they have served for at least five years; in this
situation, these retirees qualify for the tax exemption under R.A.
No. 7641; but the moment the employer obtains approval of the
B.I.R. for a retirement plan containing those provisions, the
retirement benefits for these employees become taxable.

And that you submit that the reasonable reconciliation of the tax exemption
under R.A. No. 4917 and R.A. No. 7641 is to hold:
1.

That any retiree who satisfies the requirements of R.A. No. 7641
(retirement under a CBA or other applicable employment, and
service for at least five years) is entitled to the tax exemption, even
if he is a member of a reasonable private benefit plan established
by his employer and approved by the B.I.R., if the retirement
benefit he receives from the Plan is equal to or less than the
minimum retirement benefit provided by R.A. No. 7641. This
would avoid the absurd situation where an employee who fails to
meet the 50 years retirement age or 10 years service requirements
will be taxed if he receives the retirement benefit from a B.I.R.
approved retirement plan, but not if his employer does not have
such a retirement plan or if the retirement plan is not B.I.R.
approved.

2.

That if he receives from the B.I.R. approved plan a retirement

benefit in excess of the minimum retirement benefit provided by
R.A. 7641, he must satisfy the requirements or conditions of R.A.
No. 4917, which means that he must be at least 50 years old and
must have served 10 years, in order to enjoy the tax exemption.
This is but fair since it is clear that the retirement benefit comes
from the B.I.R. approved voluntary plan and not from the
requirements of R.A. No. 7641.

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3.

It is needless to add that the tax treatment of retirement benefits

received by employees outside of a B.I.R. approved retirement plan
will be governed by R.A. No. 7641.

This Office is amenable to your proposal that if the retirement benefit to be

received by a member of a private benefit plan established by the employer under
R.A. No. 4917 and duly approved by the BIR is equal to or less than the minimum
retirement benefit provided by R.A. No. 7641, said benefits shall be exempt from
income tax to prevent an absurd situation where the retirement benefits will be exempt
if an employer does not have such a retirement plan or if the retirement plan is not
approved by the BIR.
CDHSac

However, if the employee receives from the BIR approved plan a retirement
benefit in excess of the minimum retirement benefit provided by R.A. No. 7641, he
must satisfy the requirements or conditions of R.A. No. 4917, which means that he
must be at least fifty (50) years old and must have served the company for at least ten
(10) years in order that his retirement benefits may be tax exempt. This is but fair
since it is clear that the retirement benefit comes from the BIR approved voluntary
plan and not from the requirement of R.A. No. 7641.
Finally, retirement benefits received by employees not from a BIR approved
retirement plan shall be governed by R.A. No. 7641.

Very truly yours,

(SGD.) JOSE MARIO C. BUAG

Deputy Commissioner
Legal & Inspection Group

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