BIR Ruling No. 001-2024

BUREAU OF INTERNAL REVENUE REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE

National Office Building Quezon City

Sec.32(B)(6)(a), NIRC O= 000-00 2] o 2 Person to' Contact: Chief, Legal & Legislative Division Tel Nos. 8926-5536 / 8927-0963 Date: JAN 0 9 2024

Matina 8000 Davao City SOUTHERN MOTORS OF DAVAO, INC. 122 Mac Arthur Highway, SMDI Building

Attention: Mr. Jackson T. Liu . President & General Manager Gentlemen:

benefits of your employee who has reached the age of sixty (60) years old and rendered six 0) years of service under the qualified retirement plan of the establishment. This refers to your request for a legal opinion on the tax treatment of the retirement

Background

multiplied by the number of years of credited. service. Likewise, said employee may I:e unless specifically waived by the Company. normal retirement age of sixty (60) years old and has rendered at least five (5) years in servi:e is entitled to a lump sum benefit payment equivalent to the latest monthly basic salary continued in the service beyond his normal retirement date but not beyond his 65th birthd::y with the Bureau of Internal Revenue (BIR). It provides retirement pay to its qualified employees. Under Section 1 of Article V of its retirement plan, an employee who reaches a Southern Motors of Davao, Inc. (the "Company") Retirement Plan is duly registered

benefit plan issued to the Company on August 10, 2020, the retirement benefits received by a forth are met: (i) the employe- nad been in the service of the same company for at least ten (10) years; and he is at least filty (50) years old at the time of retirement. qualified employee shall be exempt from income tax provided that the two (2) conditions set Under the BIR Certificate of Qualification as &. reasonable employees' retiremert

retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty (60) or more, but not beyond sixty- five (65) years 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 eve:: year of service. On the other hand, Republic Act (RA) No. 7641 provides that "in the absence of a

SOUTHERN MOTORS OF DAVAO, INC. Page 2 of 3 OT-001 -2024 JAN 0 9 2024

years old and had rendered six (6) years of service from an establishment with a duly registered retirement plan, his retirement benefits wiill be exempt from income tax. retirement plan shall be subject to income tax while. if the establishment has no registered Thus, it appears that the retirement benefits of an employee who reached sixty (60)

You now request for a ruling on the following issues: 1) Is it the intention of Section 32 (B)(6)(a) of the National Internal Revenue basic salary multiplied by the number of years of credited service? Retirement Age of sixty (60) years old and at least five (5) years in service to be entitled to a lump sum benefit payment equivalent to the latest monthly benefits of an employee who reached sixty (60) years old and had rendered six (6) years of service from an establishment with a duly registered retirement plan even if the qualified retirement plan provides for a Normal Code (Tax Code):of 1997, as amended, to subject to income tax the retirement

2)Is it correct to interpret that only the excess retirement pay between the one- month salary as 'stated under Section 1, Article V of the Company's retirement plan and the half-month salary as provided under RA No. 7641 shall be subject to income tax? Discussion/Ruling

employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement. taxation provided that the retiring official or employee has been in the service of the same firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall not be included in gross income and shall be exempt from benefits'received under RA No. 7641 and those received by officials and employees of private Pursuant to Section 32.(B)(6)(a) of the Tax Code of 1997, as amended, retirement

retirement benefit plans, shall grant their displaced employees retirement benefits without subjecting the same to withholding income tax provided that the age and length of service requirements under Section 32 (B)(6)(a) of the Tax Code of 1997, as amended, are satisfied. he is at least 50 years old at the time of retirement. Hence, companies which have reasonable requirements of 50 years of age and 10 years of service. However; the Retirement Plan can employees shall be exempt from income tax, provided that the two (2) conditions are met, viz. provide for more than 50 years old and 10 years of service.' Thus, if the company maintains a private retirement plan which have been determined by the Bureau' of Internal Revenue as a (1) the employee had been in the service of the same private firm for at least 10 years; and (2) 'reasonable retirement benefit plan," the retirement benefits that will be received by the It is undisputed that the above-cited provision provides merely. for the minimum

1 BIR Ruling No. DA-625-07.dated December 7, 2007

O-001-2024 JAN 0 9 2074

Page 3 of 3 SOUTHERN MOTORS OF DAVAO, INC.

exempt from income tax if the employee retired and received the retirement benefits during the covered period of June 5 to December 31, 2020.2 employee did not meet one of the conditions, particularly on the length of service under the approved employees' retirement benefits plan, the retirement benefits may be considered Under the RA No. 11494 or the Bayanihan to Recover as One Act, although the

at least five (5) years; and (2) he is at least sixty (60) years old but not beyond sixty-five (65) six (6) months being considered as one whole year. employees in the absence of any retirement plan, collective bargaining agreement, or other benefits that will be received by the retiring employee shall be exempt from income tax, provided that the two (2) conditions are met, viz.: (1) the employee had been in the service for years old at the time of retirement. The retiring employee 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 applicable employment contract in the establishment. Under RA No. 7641, the retirement On the other hand, RA 76413 provides for the retirement pay to qualified private sector

benefits of an employee who reached sixty (60) years old and had rendered six (6) years of service in the same Company with a duly registered retirement plan are subject to income tax and consequently, to the withholding tax because he/she failed to meet the length of service (10 years) requirement in order for the retirement benefits to be tax exempt under Section 32 (B)(6)(a) of the Tax Code of 1997, as amended. IN VIEW OF ALL THE FOREGOING,this Office hereby rules that the retirement

if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. This ruling is being issued on the basis of the foregoing facts as represented. However.

Very truly yours.

ROME D. LUMAGUI, JR. mnissioner of Internal Revenue

K-

3 An Act Amending Article 287 of Presidential Decree No. 442, As Amended, Otherwise Known as The Labor 2 Revenue Memorandum Circular No. 120-2020 Code of the Philippines by Providing for Retirement to Qualified Private Sector Employees in the Absence of Any Retirement Plan in the Establishment