We are reprinting the latest ruling by the Bureau
of Internal Revenue on the harmonization of the
salient provisions between R.A. 4917 and R.A. 7641
in a letter sent to Atty. Sabino Padilla Jr. –
CEAP Legal Counsel per DA-151-2004 dated 03-31-2004.
PADILLA LAW OFFICE
7/F Padilla-De Los Reyes Building
232 Juan 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 aged fifty (50). The question sqarely raised
is whether their retirement benefits are subject
to withholding”.
“It is our opinion that since R.A. 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 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. 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 provided 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. xxx”.
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 benefits 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 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 quivalent
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
R.A. 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:
- An employer who sets up a reasonable private
benefit plan, but does not secure BIR 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 BIR. Neither can he
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 BIR, or
- 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 momemt
the employer obtains approval of the BIR 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:
- 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 BIR, if the retirement benefit he receives
from the Plan is equal to or less than the minimum
requirement 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 BIR
approved retirement plan, but not if his employer
does not have such a retirement plan or if the
retirement plan is not BIR approved.
- That if he receives from the BIR 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 BIR approved voluntary plan and
not from the requirements of R.A. No. 7641.
- It is needless to add that the tax treatment
of retirement benefits received by employees outside
of a BIR 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.
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,
(Signed) JOSE MARIO C. BUNAG
Deputy Commissioner
Legal & Inspection Group
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