EXEMPTION ON RETIREMENT BENEFITS
By: Atty. Aziza Hannah Bacay on November 19,2020.
Republic Act (RA) 11494, or the “Bayanihan to Recover as One Act” (Bayanihan 2), which implements the government’s response and recovery interventions related to the Covid-19 pandemic, granted some tax relief and incentives to taxpayers. One of these incentives is an income tax exemption on retirement benefits, subject to certain conditions.
Section 5 of Bayanihan 2 granted another tax exemption on such benefits, particularly those received by officials and employees of private firms from June 5 to Dec. 31, 2020.
This exemption, however, is subject to the condition that the employee shall not be reemployed by the same firm or its related parties within the next 12 months. Otherwise, the retirement benefits shall be subject to income tax. If the reemployment occurs within this year, the employer is obliged to withhold the income tax; if in 2021, the employee shall report his or her own income tax (Revenue Regulations 29-2020, Oct. 15, 2020).
It should be noted that retirement benefits are excluded from gross income under Section 32(B)(6) of the National Internal Revenue Code (NIRC), as amended, subject to these conditions:
– the benefit is received under RA 7641, or the Retirement Pay Law.
– the benefit is in accordance with a reasonable qualified private benefit plan approved by the Bureau of Internal Revenue (BIR), provided that this is received by an employee who is not younger than 50 years old at the time of retirement, and who has rendered at least 10 years of service to the same employer.
It was explained in Revenue Memorandum Circular (RMC) 120-2020, dated Nov. 9, 2020, that retirement benefits may still qualify for exemption under Bayanihan 2, regardless of the age and/or length of service of the employee, provided these are based on a duly registered and qualified retirement plan with the BIR. This effectively eases the requirements under the NIRC. Thus, this is beneficial to employees who may be given options for early retirement in view of the pandemic.
Furthermore, RMC 120-2020 clarified that retirement benefits received under the Retirement Pay Law during the covered period shall continue to be exempt, since this is pursuant to the Retirement Plan Law and the NIRC and not under the Bayanihan 2. Such benefits apply even in the absence of a qualified retirement plan registered with the BIR.
RMC 120-2020 also provides that both the date of retirement of the employee and of receipt of the retirement benefits should fall within the covered period of June 5 to Dec. 31, 2020 in order to be exempt from income tax. Any amount granted by employers in excess of what is within the retirement benefit plan shall also be subject to income tax.
Other tax incentives under Bayanihan 2 also includes exemption from income tax on Covid-19 special risk allowance, actual hazard duty pay for frontliners and compensation paid to health workers who have contracted Covid-19; exemption from duties and taxes on the manufacture or importation of critical and needed equipment or essential goods; exemption from import duties and taxes and from donor’s tax on the importation of computers, laptops and other equipment for the use of and donation to public schools; extension to five years of the period to carry over net-operating loss sustained for taxable years 2020 and 2021; and exemption from additional DST on term extensions and credit restructuring, among others.