Business Mirror

Atty. Fulvio D. Dawilan discusses his comments on the conditions for the tax exemption of retirement benefits as provided under the Bayanihan II Act.

Retirement Benefits: Tax Exemption Under the Bayanihan to Recover as One Act

By: Fulvio D. Dawilan

Two weeks ago, my colleague, Rodel Unciano, wrote in this column about the features of the exemption from tax of retirement benefits as provided under Republic Act No. 11494 (“Bayanihan II”) and as implemented by Revenue Regulations No. 29-2020 (“RR 29-20”. Let me further elaborate on this, especially in relation to the conditions or limitations imposed for the entitlement to the tax exemption.

Recall that in the said law, retirement benefits received by officials and employees of private firms, whether individual or corporate, from June 5, 2020 until December 31, 2020 shall be excluded from gross income and shall be exempt from taxation. The law, however, includes a proviso to the effect that any re-employment of the retired employee in the same firm, within the succeeding twelve month period shall be considered as proof of non-retirement, and shall subject the benefits received to appropriate taxes. In essence, if an employee is re-hired by the same employer within the next twelve months, he will not be considered retired and the supposed retirement benefits will be subjected to tax. This is the only limitation or condition on the exemption from tax of the said retirement benefits.

The Courts had consistently upheld the principle to the effect that in the implementation of laws and in the crafting of regulations by administrative bodies and implementing agencies, the implementation is necessarily limited to what is provided for in the legislative enactment. It cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute.

With this in mind, allow me to state that the exemption described in Bayanihan II does not make any reference, either by exclusion or inclusion, to those retirement benefits and their exemption as specified in the Tax Code. The only reference to the Tax Code is with respect to the penalty to be imposed on a person who willfully evades or defeats the payment of taxes through the said exemption. Apparently, the only condition or limitation for the availment of exemption is that the retiring employee should not be rehired within the next twelve months after retirement and that the exemption should not be used as a scheme to evade or prevent the payment of taxes.

On this note, the law should not be expounded to include or exclude those not specified in the law. Neither should additional conditions be provided that would limit the coverage of retirement benefits entitled to the exemption. Relative to this, the provision on tax exemption of retirement benefits under the Bayanihan II does not limit, expressly or impliedly, its coverage to the retirement benefits received in accordance with retirement plans duly-registered with the BIR.

In fact, the exemption of retirement benefits under Bayanihan II does not exclude the retirement benefits already exempted based on the existing laws. Based on the rules provided in the Tax Code, retirement benefits may be received either under Republic Act No. 7641 or in accordance with a reasonable private benefit plan maintained by the employer. If the conditions under RA 7641 or under the private benefit plan are met, the retirement benefits shall be exempt from tax. But that does not imply that since the benefits are exempt under RA 7641 or under the reasonable private benefit plan, the retiring employee or employer may not resort to availing the exemption under Bayanihan II. It may sound absurd to refer to other basis for exemption when the benefit is already exempted from tax following the existing rules. But that’s a choice to be made by the employee or his employer. The point is – the exemption from tax under Bayanihan II is not limited to those received under reasonable private benefit plan, to the exclusion of retirement benefits received from the employer or from non-BIR qualified plan. To do so would be limiting the exemption to a few retirement scenarios.

As presently crafted, the regulations would effectively exclude a number of benefits that the law attempts to exempt. Again, as the law did not qualify, all retirement benefits received within the specified period should be exempted. Apparently, to anchor such limitation on the basis that employees could be separated on some other basis, such as redundancy or other causes beyond the control of the employee, and still enjoy exemption from taxes, has no basis. The reasons for retirement (even early retirement) are not necessarily the same as the reasons for separation due to causes beyond the control of the employee. Also, there are a number of conditions and compliance for the exemption of separation benefits that are not required for retirement benefits. It may not therefore be appropriate to exclude retirement benefits from exemption on the premise that the benefits could be exempted as separation benefits.

In so far as exception to the exemption due to re-employment is concerned, the law refers to the re-hiring with the same firm. However, RR 29-20 extended the same to re-employment with the employer’s related parties. This means that should the employee be rehired by an employer that is related to the former employer, the tax corresponding to the retirement benefits should be paid. If that is the intent, the law would have clearly indicated that. That is NOT the case though.

The Bayanihan II relaxed the conditions on tax exemption for retirement benefits, but for a limited period, from June 5, 2020 to December 31, 2020. Apparently, because of the situation faced by businesses caused by the COVID 19 pandemic, employers are forced to retire employees ahead of their scheduled retirement. Any retirement benefits received during the period covered should therefore exempted from tax, without conditions other than that provided by the legislators.