Tax exemptions on retirement plans: Revalidated and clarified

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.

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.

Aileen Grace P. Pizaña is a supervisor from the tax group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. –Aileen Grace P. Pizaña (The Philippine Star)

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email manila@kpmg.com or rgmanabat@kpmg.com.
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