March 17, 2003

BIR RULING [DA-083-03]

32 (B) (6) (a)

DA-018-03

Esquivias Cruz Conlu & Yabut

U2402 Jollibee Plaza Bldg.
Emerald Avenue, Ortigas Centre
Pasig City

Attention: Atty. P. Winston G. Conlu

Gentlemen :

This refers to your letter dated October 18, 2001 seeking for a
clarificatory ruling on the following issues:
1. Whether or not the stand taken by the Regional Director of Region
No. 16 requiring Alsons to pay Donor's tax on the one month
company assistance paid to the retiring employee is correct;
2. Whether Alsons acted correctly in withholding the tax on the said
one (1) month basic pay for every year paid to the retiring
employee by way of company assistance and/or whether the said
payment is subject to withholding tax or not;
3. In the event that the company made an erroneous withholding of the
tax on compensation payment to its employees, who is the
proper party who should seek refund — the company as the
withholding agent or the employee-payee?
relative to the taxability of retirement benefits, in the light of the ruling
issued by RR No. 16 numbered RDA-RR-No. 16- Ruling No. 39-01 issued on
August 14, 2001.
It is represented that Alsons Cement Corporation (Alsons) maintains a
retirement benefit plan providing for a retirement fund for the benefit of its
employees; that the normal retirement age for qualified employees is upon
reaching the age of sixty (60) years or when the employee has worked for
the company for thirty (30) years; that likewise, early or optional retirement
may be allowed when an employee reaches the age of fifty-five (55) years or
after rendering twenty (20) years of service; that once an employee retires
in accordance with any of these criteria, he is to receive one (1) month basic
pay from the Retirement Fund Benefits; that in addition, the company
provides for another one (1) month pay for every year of service by way of
company assistance; that one of the qualified employees of Alsons, Mr. Alex
Wong, retired from the service on December 31, 2001 at the age of 56 years
after serving the company for a period of thirty (30) years; that pursuant to
Alson's retirement policy, the said employee shall receive two (2) months
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 pay for every year of service, one (1) month basic pay for every year of
service coming from the Retirement Fund and the other one (1) month pay
coming directly from the company; that Alsons did not withhold any tax on
the one (1) month basic pay from the Retirement Fund Benefits due to Mr.
Wong for being exempt under the law; that, however, with regard to the
additional one (1) month basic pay for every year of service paid directly by
the company, Alsons withheld the corresponding tax and remitted the same
to the BIR; and that the retiring employee objected to the withholding of the
tax and sought a ruling from BIR Regional Office No. 16, Cagayan de Oro
which ruled that:
"A. The one month pay from the retirement fund benefits shall
be exempt from income tax and consequently from the withholding
tax prescribed in Section 79, Chapter III, Title II of the Tax Code of
1997;
B. The other one month company financial assistance does not
constitute an additional income or salary since it is a gift or gratuity
given by the company, such that the company should pay the Donor'
Tax on the transaction."
In reply, please be informed that under Section 32(B)(6)(a) of the Tax
Code of 1997, retirement benefits received under Republic Act 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 shall not be included in gross income and shall
be exempt from taxation under Title II of the said Code, Provided, that the
retiring official or employee has 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 his
retirement and that the benefits granted shall be availed of by an official or
employee only once.
Records of this Office show that Alsons does not maintain a private
benefit plan duly approved by this Office but Alsons maintains a company
policy under Alsons Human Resource Policies (ALCEM-HR-03-10) which
provides, viz.:
"ARTICLE IV
RETIREMENT DATES
SEC. 1. NORMAL RETIREMENT. —
The normal retirement date of a Member shall be the first day
of the month coincident with or next following his attainment of age
sixty (60)
SEC. 2. EARLY RETIREMENT. —
Member may, with the approval of the Company, retire early on
any first day of the month coincident with or following his attainment
of age fifty-five (55) or after rendering twenty (20) years of service in
the Company."
"ARTICLE V
PAYMENT OF BENEFITS
SEC. 1. RETIREMENT BENEFIT. —

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 Upon retirement, a Member shall be entitled to a retirement
benefit equal to 100% of his Final Monthly Basic Salary for every year
of his Credited Service. Credit shall be given for an incomplete year at
the rate of one-twelfth (1/12) of the full year's credit for each
completed month of Credited Service. A fraction of six (6) months or
more shall be considered one (1) whole year while for a fraction of
less than six (6) months, the actual fraction of the year shall be used,
based on 365 days per year."
In addition, the company has an existing Collective Bargaining
Agreement which provides:
"Article XIII
Retirement/Separation Benefits
SEC. 1. Retirement Plan — The Company and the Union agree
that the present retirement plan shall be maintained. The Company
and the Union further agree to include 20 years of service under the
optional retirement scheme. The prerogative to accept or deny an
early optional retirement application of any qualified employee rests
solely on Management.
The Company shall issue a general policy to the effect, copy
furnished the Union. The present practice of giving retirement pay
two (2) months base pay per year of service (1) month from
retirement fund and 1 month company assistance shall be
maintained."
xxx xxx xxx
Considering that Alsons does not maintain a "reasonable private
benefit plan" duly approved by the BIR, then the provisions of Republic Act
No. (RA) 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" shall apply.
Sections 1 and 2 of R.A. 7641 provides, viz.:
"SEC. 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
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 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.
"Unless the parties provide for broader inclusions, the term one-
half (1/2) month salary shall mean fifteen (15) days plus one-twelfth
(1/12) of the 13th month pay and the cash equivalent of not more
than five (5) days of service incentive leaves.
xxx xxx xxx"
"SEC. 2. Nothing in this Act shall deprive any employee of
benefits to which he may be entitled under existing laws of company
policies or practices."
Such being the case, the retirement benefit of two (2) months basic
pay per year of service consisting of one (1) month from the retirement fund
benefits and one (1) month from company assistance as provided in Alsons
Collective Bargaining Agreement received by Mr. Alex Wong is exempt from
income tax and consequently from the withholding tax under Section 79,
Chapter III, Title II of the Tax Code pursuant to R.A. 7641 in relation to
Section 32(B)(6)(a) of the Tax Code of 1997. (BIR Ruling No. DA-018-03
dated January 23, 2003) cSaATC

Ruling No. RDA-RR16-Ruling No. 39-01 dated August 14, 2001 ruled to
the effect that "The other one month company financial assistance does not
constitute an additional income or salary since it is a gift or gratuity given by
the company, such that the company should pay the Donor's Tax on the
transaction" is erroneous. Accordingly, the same is hereby revoked. The one
(1) month for every year of service company assistance which is provided in
Art. XIII of the Collective Bargaining Agreement is part of the retirement
package which is exempt from income tax pursuant to Section 32(B)(6)(a) of
the Tax Code of 1997 in relation to Sections 1 and 2 of R.A. 7641.
Moreover, considering that Alsons had already withheld and remitted
the corresponding withholding tax, Mr. Alex Wong may file a written request
for refund of the said withheld tax within two (2) years from the date of
actual filing of the income tax return or the last day prescribed by law for
filing the return whichever comes earlier, at the Revenue District Office/BIR
Office where Mr. Wong is registered pursuant to Revenue Delegation
Authority No. 3-2002 dated February 15, 2002. However, when on the face
of the return upon which payment was made, such payment appears clearly
to have been erroneously paid, the Commissioner may refund or credit the
same even without a written claim therefor. In this case, the processing of
the refund in favor of Mr. Wong should be done by the Revenue District
Office No. 98, Cagayan de Oro City.
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,

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 Commissioner of Internal Revenue
By:

(SGD.) MILAGROS V. REGALADO

Assistant Commissioner
Legal Service

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