As we continue to navigate a new normal and grapple with these times of uncertainty, we have come to immensely value clarity. In this aspect, with the passage of Republic Act No. 11494 (Bayanihan II), the Bureau of Internal Revenue (BIR) released issuances to clarify its implementation. Among these are Revenue Regulation (RR) No. 29-2020 and Revenue Memorandum Circular (RMC) No. 120-2020, which intend to explain the tax exemptions on certain income payments given to employees during the pandemic.
These regulations are welcome aids. However, in what appears to be a Catch-22 situation, such guidance carries restrictive trade-offs.
CONDITIONS FOR RETIREMENT-BENEFIT TAX EXEMPTIONS
Section 5 of Bayanihan II provides that early retirement benefits granted to privately employed persons between June 5, 2020 and Dec. 31, 2020 are exempt from tax. The exemption, however, may be revoked if the individual is re-employed by the same organization within the succeeding 12 months. Re-employment is proof of non-retirement, making the benefits subject to the appropriate taxes.
These conditions are echoed in RR No. 29-2020, which also clarified that such relief is exclusive of the existing tax exemption under Section 2.78.1(B)(1) of RR No. 2-1998, as amended. This means that employees who avail of the retirement exemption under Bayanihan II may still qualify for another exemption in the future upon meeting the conditions under Section 32(B)(6)(a) of the Tax Code, which provides a minimum retirement age and years of employment.
However, the RR also provided that the exemption under Bayanihan II only applies to retirement benefits paid under a plan duly registered with the Bureau. Such a condition is noticeably absent from the provision in the law. This additional administrative requirement was reiterated through the clarificatory examples provided in RMC No. 120-2020.
Despite the welcome clarity that the regulations provided, this prerequisite makes the exemption restrictive. Effectively, fewer retirement plans qualify for this tax relief in comparison to the existing Tax Code exemption, which also exempts the minimum retirement pay under the law in the absence of a private retirement plan. Ironically, the implementation of the exemption contradicts the implicit intent of the law, which is to provide universal relief to both businesses and individuals. Consequently, the BIR did not merely interpret the law but appears to have legislated beyond the statute passed by Congress. Well-settled is the principle that administrative regulations cannot go beyond the law to amend a legislative enactment.
Moreover, RMC No. 120-2020 clarified the period of availment to qualify for the exemption. Both the date of retirement and the date of receipt of the retirement pay should fall between June 5, 2020 and Dec. 31, 2020. This prohibitive interpretation of the law further advanced the conflicting objectives of the BIR regulations and Bayanihan II.
Given the limited nature of this retirement tax exemption, one may be inclined to prefer the receipt of separation pay instead. Terminal pay is also tax-exempt when granted due to separation beyond the control of the employee. Thus, the BIR regulations may have rendered the tax exemption in Bayanihan II less beneficial and less useful in comparison to the options currently available in the law.
TAX FILING AND ADMINISTRATIVE REQUIREMENTS
Despite such drawbacks, RR No. 29-2020 and RMC No. 120-2020 provide clear guidance on the administrative and filing requirements for the tax exemption. Employers are required to submit a one-time list of the recipients of these early retirement benefits, due on Jan. 15, 2021, to the appropriate Revenue District Office (RDO) or the Large Taxpayers Service (LTS). Employers must also include such payments in the Alphabetical Listing (Alphalist) they submit annually. Further, the employee is entitled to a refund if taxes have been withheld from benefits qualified for exemption.
In the event of re-employment within 12 months in the same organization, the exemption is revoked. In such case, the individual and the employer will share the responsibility of subjecting the retirement benefits to the appropriate taxes, depending on when re-employment occurs. In case the retiree is re-employed during 2020, the employer is to include the retirement benefits paid as gross taxable income of the employee during its year-end annualization.
The responsibility shifts to the employee if re-employment occurs in 2021. In this case, the employee must file an Annual Income Tax Return to declare the benefits received and pay the taxes due thereon. The return is due on April 15, 2021, if re-employment happens between Jan. 1 and March 16, 2021. This deadline is extended without penalty to Oct. 15, 2021 if re-employment occurs between March 17 and Sept. 15, 2021. Beyond this date, the deadline is 30 days after re-employment. Concerned employers are also required to submit a quarterly list of re-employed retirees 30 days after the close of every quarter in 2021.
In addition to the guidelines for tax-exempt retirement benefits, RR No. 29-2020 also covers tax-exempt income items provided to frontliners. These income payments include (1) COVID-19 Special Risk Allowance provided to health workers, (2) Actual Hazard Duty Pay given to Human Resources for Health, and (3) specified amounts of compensation paid to health workers who contracted the disease or passed away while in the line of duty.
The pandemic has not only halted movement within communities but has also reordered society. Inevitably, hardships and obstacles will abound, exponentially increasing the value of support, reassurance, and relief. This need is what Bayanihan II seeks to satisfy. However, the long-term benefits and real merits of this law will only resonate if implemented by regulations that undertake the same purpose.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Audrey Anne A. Arocha is a Senior Associate at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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