Tax notes: Tax treatment of retirement benefits under RA 7641

UNDER Section 32(B)(6)(a) of the Tax Code, retirement benefits received under Republic Act (RA) 7641 shall not be included in the gross income of the retiring employee and are therefore exempt from tax. However, this provision only applies in the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment. Moreover, in order to be exempt from tax, the employee should have reached 60 years of age, but should not be beyond 65 years and should have spent at least five years in the service of the same employer.

In the instant case, the company does not maintain a retirement plan and there is no existing collective bargaining agreement between the employer and employee. Hence, the conditions under RA 7641 shall govern the taxation of employees’ retirement benefits.

As held by the Bureau of Internal Revenue (BIR) in BIR Ruling No. 297-2012 dated May 3, 2012, considering that the employees have reached 60 years of age and have rendered at least five years of service in the company, the retirement benefits received by employees from the company are not subject to tax and, consequently, to withholding tax.

However, the terminal pay, i.e. commutation and payment of monetized unused vacation leave credits exceeding 10 days, and sick leave credits regardless of number of days, are subject to income tax. The exemption does not include the payment to the employees of their salaries and 13th month pay and other benefits in excess of P30,000 threshold under Section 2.78.1(A)(3)(a) and (A)(7) of Revenue Regulations (RR) 2-98.

(Source: Punongbayan & Araullo)