Tax exemptions on retirement plans:

Revalidated and clarified

TOP OF MIND By Aileen Grace P. Pizaña (The Philippine Star) | Updated January 14, 2014 - 12:00am

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Retirement laws aim to assist retirees in their old age, and hopefully not to punish them for having survived. This has been
one of the underlying principles in granting significant benefits and income tax exemptions to retirees.

One of the notable exemptions is found in Republic Act (RA) No. 4917 (An Act Providing that Retirement Benefits of
Employees of Private Firms shall not be subject to Attachment, Levy, Execution, or any Tax whatsoever), now embodied in
Section 32(B)(6)(a) of the Tax Code which states, among others, that retirement benefits received by officials and
employees of private firms in accordance with a reasonable private benefit plan maintained by the employer shall be exempt
from income tax, provided: (1) The retiring official or employee has been in the service of the same employer for at least 10
years; (2) The retiring official or employee is not less than 50 years of age at the time of his retirement. (3) The retiring
official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or
another employer.

A “reasonable private benefit plan” means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer
for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials
or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund
thus accumulated. Relevant revenue regulations prescribe in detail the requirements for a reasonable retirement benefit plan
to be determined as a tax-qualified plan by the Bureau of Internal Revenue (BIR).

Correspondingly, BIR Ruling No. ERP-267-07 dated Sept. 21, 2007 declared that a certain Retirement Plan, being a
reasonable retirement trust, is exempt, among others, from the 20 percent and 7.5-percent final taxes on the interest
income derived from local bank deposits and foreign currency deposits, respectively, as imposed under Section 27 (D)(1) of
the Tax Code. On August 2011, the proponent for the same Retirement Plan requested a revalidation on the exemption of
the Retirement Plan from the 20 percent and 7.5-percent final taxes on interest income.

Last June 27, 2013, the BIR issued BIR Ruling No. 234-13 revalidating that the said retirement plan is exempt from final
taxes on interest income. This time, however, the BIR observed that the retirement plan provides that the normal retirement
date of an employee-member shall be the first day of the month coincident with or next following his 60th birthday provided
he has served the company for at least five years of credited service. Consequently, the BIR asserted that the retirement
benefits payable to the retiring member shall not be exempt from income tax.

The BIR clarified that in order for the retirement benefits to be received by the qualified employee-member may be granted
tax exemption, the age and length of service requirements set forth under Section 32 (B)(6)(a) of the Tax Code must be met,
such that: (1) The official or employee is at least 50 years old at the time of retirement; (2) The official or employee had
been in the service of the same private firm for at least 10 years.

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It is worthy to note, however, a March 2004 ruling [BIR Ruling (DA-151-04)], when the BIR reconciled the rules on retirement
benefits obtained under a retirement plan (governed by RA 4917) vis-a-vis the retirement benefits obtained without a
retirement plan (governed by RA 7641). RA 7641 requires employers to pay retirement benefits to employees who have
reached the age of 60 years or more, but not beyond 65 years with at least five years of credited service (shorter length of
service but longer age requirement).

The said 2004 ruling opined that to avoid the absurdity of a situation where, among others, an employee covered under a
BIR-approved retirement plan would be subject to tax but not if he is not covered under a retirement plan or if the retirement
plan is not a BIR-approved plan, the BIR provided the following rules: (1) If the retirement benefits received under a BIR-
approved retirement plan covered by RA 4917 is equal to or less than the minimum retirement benefit provided by RA 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. (2) If the retirement
benefits received under a BIR-approved retirement plan covered by RA 4917 exceed the minimum retirement benefit
provided by RA 7641, the employee must comply with the conditions of RA 4917 in order that his retirement benefits may be
tax-exempt.

Then again, BIR Ruling No. 234-13 which is the more recent ruling, did not mention the qualification stated in BIR Ruling
(DA-151-04). Instead, the BIR maintained that the age and length of service requirements under the Tax Code must be
complied with to avail of the tax exemption on the retirement benefits.

Based on this recent 2013 issuance, it appears that the age and length of service requirements imposed under the Tax
Code are deemed by the BIR as minimum requirements for retirement benefits to qualify for income tax exemption. On the
other hand, a retirement plan may provide for a retirement date more than the minimum requirement by the Tax Code. In
such case, the employee must comply not only with the minimum requirements provided in the Tax Code but also with the
higher retirement date set forth in the retirement plan to avail of the income tax exemption. (BIR Ruling No. 52-2000
dated Oct. 30, 2000)

In view of the foregoing, we believe that it will be prudent for employers to review their respective retirement plans and
ensure that they comply with the minimum requirements for retirement benefits for employees to be entitled to income tax
exemption granted by the Tax Code. Indeed, while it is true that retirement laws should be liberally construed and applied in
favor of the retiree to achieve its humanitarian purposes, it seems that the exclusion of the retirement benefits from gross
income follows the rule on strict interpretation against tax exemptions.

Taxation of retirement benefits

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Taxation of retirement benefits

by: SENEN M. QUIZON
Prior to January 01, 1998 when Republic Act (“RA”) No. 8424 or Tax Reform Act of 1997
took effect, the coverage of the income tax exemption of retirement benefits under Section
32(B)(6)(a) of the said Code was confined to retirement benefits received by officials and
employees in private firms in accordance with a reasonable private benefit plan. A
“reasonable private benefit plan” is a pension, gratuity, stock bonus or profit-sharing plan
maintained by the employer for his officials and employees which is qualified as such by
the Bureau of Internal Revenue (BIR) upon satisfaction of the requirements imposed under
its Revenue Regulations No. 1-68, as amended.
Aside from the requirement that the plan should be reasonable, the Tax Code requires that
the retiring employee should have been in the service of the same employer for at least ten
years and is not less than fifty years of age at the time of his retirement. The taxpayer
should not also have previously availed of the privilege under a retirement benefit plan for
the same or another employer. The age and length of service requirements imposed under
RA No. 4917 [now Section 32(B)(6)(a) of the Tax Code] are deemed by the BIR as
minimum requirements for retirement benefits under a reasonable private plan to qualify for
tax exemption. Thus, higher age and length of service requirements maybe required by the
provisions or rules and regulations of the retirement plan and these shall prevail over the
requirements imposed under the Tax Code in case of conflict. (BIR Ruling No. 052-2000,
October 30, 2000)
To promote equity in the taxation of retirement benefits, RA No. 8424 extended the income
tax exemption of retirement benefits under RA 4917 to those received by officials and
employees in the private sector under the provisions of RA No. 7641. R.A. No. 7641
requires employers, in the absence of retirement plan or agreement, to pay employees
upon reaching the age of sixty years or more, but not beyond sixty-five years and who
have rendered at lease five years in the said establishment, a retirement benefit equivalent
to at least one-half month for every year of service. Compared to RA No. 4917, RA No.
7641 specifies a shorter length of service but longer age requirement.
The BIR held in various rulings that the tax exemption privilege granted to retirement
benefits under RA No. 7641 can only be invoked when there is no existing retirement plan,
CBA, or other applicable employment contract in the establishment. In the presence of a
retirement plan duly approved by the BIR, CBA, or applicable employment contract
providing for retirement benefits, the same shall be followed provided that it shall not be
less than those provided under RA No. 7641.
Applying the rules on the age and length of service requirements under the two laws, it is
possible, for example, that a 61-year old employee who has rendered nine years of
continuous service will be subject to tax if he receives the retirement benefits from a BIR
approved retirement plan, but not if his employer does not maintain a retirement plan or if
the retirement plan is not a BIR approved plan since he will both satisfy the age and length
of years service requirements under RA 7641. Seeing apparently the absurdity of this
situation, the BIR attempted to reconcile the tax exemption of retirement benefits under RA
4917 and RA 7641 by exempting from income tax the retirement benefits under a
reasonable private benefit plan established by employer which is equal or less than the
minimum retirement benefit provided by RA 7641, while maintaining the requirements or
conditions of RA 4917 in case the retirement benefit exceeds the minimum amount of
retirement benefit imposed under RA 7641. (DA-151-2004, March 31, 2004)
With all these developments and the complexities related to the availment and payment of
retirement benefits, it maybe high time for the BIR to amend the existing revenue
regulations, particularly RR No. 1-68 as amended, by incorporating th e rules promulgated
by the BIR in its various rulings to clarify the issues and dispense with the need for
taxpayers to secure a ruling on similar cases.