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 BIR, 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 RR 2-98.
BIR Ruling No. 297-2012, May 3, 2012
Tax Brief – June 2012
Punongbayan and Araullo
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http://www.placesure.com/groups/general-public/forums/topic/tax-treatment-of-retirement-benefits-under-ra-7641/
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TumugonBurahinThe Financial Planning activity involves assessing the business environment.
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