WHEN RETIREMENT BENEFITS ARE EXEMPT FROM TAX

 

(PLEASE SEE ALSO LEGAL NOTE 0006: RETIREMENT BENEFITS IN THE PRIVATE SECTOR)

 

ARE RETIREMENT BENEFITS SUBJECT TO TAX?

 

No, under certain conditions. These conditions are:

 

(i) There must be a reasonable private benefit plan and such benefit plan  must be approved by the Bureau of Internal Revenue;

 

(ii) The retiring official or employees must have 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 retirement; and

 

(iii) The retiring official or employee shall not have previously availed of the privilege under the retirement benefit plan of the same or another employer.

 

Read case below:

 

G.R. No. 162775             October 27, 2006

INTERCONTINENTAL BROADCASTING CORPORATION (IBC), represented by ATTY. RENATOQ. BELLO, in his capacity as CEO and President, petitioner,
vs.
NOEMI B. AMARILLA, CORSINI R. LAGAHIT, ANATOLIO G. OTADOY, and CANDIDO C. QUIÑONES, JR., respondents.

 

XXXXXXXXXXXX

 

Revenue Regulation No. 12-86, the implementing rules of the foregoing provisions, provides:

 

(b) Pensions, retirements and separation pay. – Pensions, retirement and separation pay constitute compensation subject to withholding tax, except the following:

 

(1) Retirement benefit received by official and employees of private firms under a reasonable private benefit plan maintained by the employer, if the following requirements are met:

 

(i) The retirement plan must be approved by the Bureau of Internal Revenue;

 

(ii) The retiring official or employees must have 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 retirement; and

 

(iii) The retiring official or employee shall not have previously availed of the privilege under the retirement benefit plan of the same or another employer.

 

Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only once.

 

WHAT IS THE LEGAL BASIS FOR EXEMPTING RETIREMENT BENEFITS FROM TAX?

 

RA 4917:  AN ACT PROVIDING THAT RETIREMENT BENEFITS OF EMPLOYEES OF PRIVATE FIRMS SHALL NOT BE SUBJECT TO ATTACHMENT, LEVY, EXECUTION, OR ANY TAX WHATSOEVER (17 JUNE 1967)

Sec. 1.   Any provision of law to the contrary notwithstanding, the retirement benefits 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 be exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action: 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 years of age at the time of his retirement: Provided, further, That the benefits granted under this Act shall be availed of by an official or employee only once: Provided, finally, That in case of separation of an official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided.

As used in this Act, the term “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 and employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

Sec. 2.   This Act shall take effect upon its approval.

Approved: June 17, 1967

 

SUPPOSE AN EMPLOYEE IS SEPARATED FROM THE SERVICE FOR A CAUSE BEYOND HIS CONTROL, IS HIS SEPARATION PAY SUBJECT TO TAX?

 

No. As provided under R.A. 4917:

 

Provided, finally, That in case of separation of an official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided.