Resilience. Sustainability. Adaptability. You have probably heard or read these in the internet over the past days or these words might have sprung to your mind as we reflect on the situation we are currently in. A few weeks ago, I find myself listening to a discussion about how our life would look like after 2020. Looking at where we are headed, it is terrifying how the pandemic changed the world drastically. While nowadays we are starting to focus on the positive outcomes of the pandemic, we could not help but not ignore the adverse effects of COVID-19 to our lives. From the alarming number of COVID-19 casualties to the surge of unemployment rates due to business operation disruption or even closure, our means to survive during this pandemic were greatly challenged. With this at hand, governments across the globe are putting a lot of effort to develop and promulgate laws to further combat the effects of the pandemic and the Philippines is no exception.
On 11 September 2020, Republic Act (RA) No. 11494 also known as the “Bayanihan to Recover as One Act" was enacted to primarily help us recover from the unfortunate situation we are in. Among the incentives provided under this Act are tax exemptions for certain income items received by officials and employees during the pandemic. Officials or employees from both public and private firms who received their retirement benefits from June 5, 2020 to December 31, 2020 may also enjoy tax exemption as provided under Section 5 of RA No. 11494. As provided under Revenue Regulations (RR) No. 29-2020 issued by the Department of Finance (DOF), the retirement benefits shall be excluded from the taxpayer's gross income and will be exempt from tax. Although not explicitly mentioned in RA No. 11494, RR No. 29-2020 also provides that the amount paid to an official or employee should be in accordance with the existing plan registered with the Bureau of Internal Revenue (BIR). Following this requirement as cited in the issuance, it can be interpreted that a tax exemption may not be availed in the absence of a registered retirement plan.
Where there is re-employment of such official or employee by the same company and its related party within the succeeding 12-month period, the same shall be considered as proof of nonretirement. Hence, tax exemption under RA No. 11494 will not apply and the appropriate taxes should be paid accordingly. The employee will no longer qualify for substituted filing and an Annual Income Tax Return (AITR) should be filed to report his retirement benefit including other compensation income and pay the taxes due on the retirement benefits received within 30 days from date of re-employment, or on the due date of the 2nd installment payment deadline (October 15, 2020), whichever comes later, without penalties. Any taxes paid on the retirement benefits that were paid to the employee prior to the effectivity of RA No. 11494 should be refunded to employee subject to the year-end tax adjustment.
Following the issuance of the above implementing rules, the BIR issued Revenue Memorandum Circular (RMC) No. 120-2020 to further provide clarifications on the retirement benefit exemption provided under RA No. 11494 through citing certain scenarios that would qualify an employee for the said exemption. The RMC confirms that the requirements on tenure of service and age of the retiree are waived in claiming for a retirement benefit exemption under the regulation. The RMC also clarifies that both retirement date and payment date of benefits must be within the covered period. In addition, RMC No. 120-2020 provides guidance on the taxability of retirement packages offered by employers to entice retirement. The tax exemption is limited to the amount that will be paid in accordance with the registered plan and any amount in excess will be subject to tax.
To clarify the coverage of the exemption, RR No. 29-2020 states that the conditions do not cover the retirement benefits of employees under Section 2.78.1 (B)(1) of RR No. 2-98, as amended. It is noteworthy that the latter covers tax benefits provided under the existing retirement laws which include RA No. 4917 and RA No. 7641. RMC No. 120-2020 further confirms this through providing scenarios on the availment of RA No. 7641 which further clarifies that the re-employment clause under RA No. 11494 will not apply to retirement availed under the existing law.
Given the emphasis of the regulations that RA No. 11494 is separate and distinct from the exemption provided under Section 2.78.1 (B)(1) of RR No. 2-98, will it be possible to avail a tax exemption for retirement twice? Will the past and future availment of tax exemption as provided under RR No. 2-98 have or will have any impact on the availment of tax exemption under RA No. 11494?
With these new developments, we expect that the BIR will continue to provide guidance and clarity on the implementation of the law in the coming days. With the current situation we are in, we are hopeful that the implementing rules and regulations are for the benefit of every taxpayer. May RA No. 11494 help our retirees find good in their goodbyes as we are still trying to survive during this unprecedent time. Afterall, RA No. 11494 is intended to help us to be more resilient to be able to sustain and adapt a new way of living after this pandemic.
Geraldine P. Gorre is an Assistant Manager from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&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.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-kpmgmla@kpmg.com.