December 23, 2009

BIR RULING [SB-(056) 827-09]

32 (B) (6) (a); DA-206-03

Philippine Airlines
Post Office Box 1955
Manila, Philippines

Attention: Ms. Annette Y. Domingo

Manager, Administrative Payroll
Treasury Department

Gentlemen :

This refers to your undated letter seeking clarification on the taxability

of your employees' benefits at the mandatory age of 65 as herein described:
1. Employee 1
1st Separation

Age at the time of separation 55 years old

Reason Special Separation Program

Date Employed February 1, 1967

Date Separated March 15, 1999
Years of Service 31.75
2nd Separation
Age 65 years old

Reason Mandatory Retirement

Date rehired/Employed April 1, 1999

Date Separated February 1, 2009

Years of Service 9.84

Cumulative Years of Service 41.59

2. Employee 2
1st Separation
Age of Separation 56 years old

Reason Spin off

Date Employed August 25, 1965

Date Separated September 1, 2000

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 Years of Service 34.92
2nd Separation

Age 65 years old

Reason for Separation Mandatory Retirement

Date Rehired/Employed September 1, 2000

Date Separated March 1, 2009

Years of Service 8.50

Cumulative Years of Service 43.42
Background:
In 1998, Philippine Airlines, Inc. (PAL) filed a petition with the Securities
and Exchange Commission for the approval of a Rehabilitation Plan due to
among others, the continuing financial losses from operations, severe
pressure on the company's cash flows and financial difficulties for which a
quasi reorganization was approved (by the SEC) in 1999. These
reorganization & financial losses/difficulties resulted in the grant of a special
separation program and spin-off of some of PAL's operating departments.
Given these company condition, retrenchment of employees thus
resulted. Separation benefits were given to retrenched employees. However,
some of the employees retrenched were vital in the company's operation
and thus were rehired. DaTICc

Facts:
PAL has a Bureau of Internal Revenue (BIR) approved retirement plan.
The plan provides for the mandatory retirement of employees at age 65.
Issue:
Whether or not the retirement benefits received by the re-hired PAL
employees at the mandatory retirement age of 65 on the second separation
is subject to tax.
In reply thereto, please be informed that Section 32 (B) (6) (a) of the
Tax Code of 1997 provides that —
"(a) Retirement benefits received under R.A. No. 7641 and
those received by officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer: 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 (50) years of age at
the time of his retirement. . . . shall not be included in gross income
and shall be exempt from taxation."
There can be no uncertainty that the purpose of the above-quoted
provision is to exclude the retirement benefits from income tax. The first
clause of Section 32 stated so in plain language. The sole object of the two
(2) conditions enumerated is in turn unmistakably to provide merely for the
minimum requirement in order that the retirement benefits to be given to
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 the official or employee may be exempt from income tax and consequently
from withholding tax. However, there is nothing in the said provision which
requires that the ten (10) years to be rendered by the employee should be
continuous, it is enough that the same is rendered to one and the same
employer, if at all.
In applying the afore-quoted provision to the instant case, it is clear
that Leticia Custodio, Nicasio Gabriel, Mariano Meneses, Zenaida San Gabriel
and Carlos Bandalan who have rendered more than ten (10) years of service
and are at least fifty (50) years of age are covered by the said law.
Accordingly, the retirement benefits to be paid to them by PAL are exempt
from income tax and consequently from withholding tax.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation, it will be disclosed that the
facts are different, then this ruling shall be considered null and void.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

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