Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was seconded to various KSl-affiliated corporations:
1. from 1999 to 2004 as Vice President of K-Gold Inc.,
2. from 2004 to 2007 as Vice President of KPB Bank;
3. from 2007 to 2011 as CEO of K-Com Inc.;
4. from 2011 to 2017 as CEO of K-Water Corporation, where Kim served as CEO for seven years until his retirement last December 12, 2017 upon reaching the compulsory retirement age of 60 years.
All the corporations mentioned are majority-owned in common by the Koh family and covered by a BIR-qualified multiemployer-employee retirement plan (MEE RP), under which the employees may be moved around within the controlled group (i.e., from one KSI subsidiary or affiliate to another) without loss of seniority rights or break in the tenure. Kim was well-loved by his employer and colleagues, so upon retirement, and on his last day in office, KSI gave him a Mercedes Benz car worth PhP 5 million as a surprise, with a streamer that reads: “You’ll be missed. Good luck, Sir Kim.”
(a) Are the retirement benefits paid to Kim pursuant to the MEERP taxable? (2.5%)
(b) Which internal revenue tax, if any, will apply to the grant of the car to Kim by the company? (2.5%)
Suggested answer only. Not an official answer and not legal advice.
**Answer:** The retirement benefits paid to Kim are non-taxable, while the grant of the car is subject to income tax.
**Legal Basis:** Under Section 32(B)(6)(a) of the NIRC, retirement benefits received under a BIR-qualified plan are exempt if the employee served the same employer for at least 10 years, is at least 50 years old, and avails of the exclusion only once. Under Section 32(A)(1), compensation for services in whatever form forms part of gross income.
**Application:** Kim served the group under a BIR-qualified multiemployer plan for over 18 years (1999–2017) without break in tenure and retired at 60, making his retirement benefits tax-exempt. However, the car granted upon retirement is a compensatory gift for past services rendered, constituting taxable gross income.
**Conclusion:** Thus, the retirement benefits are tax-exempt, whereas the car is subject to income tax.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
What are the statutory requirements for private retirement benefits to be exempt from income tax under Section 32(B)(6)(a) of the Tax Code?
Section 32(B)(6)(a) requires a BIR-qualified plan, minimum age of 50, at least 10 years of service, and single-use tax exclusion.
How are service years calculated for an employee transferred among affiliated companies under a BIR-qualified multiemployer retirement plan?
Under a BIR-qualified multiemployer plan, continuous service rendered across participating affiliates is aggregated without break in tenure.
What is the tax treatment of a luxury car given by an employer to a retiring executive in recognition of past services?
Property given by an employer to a retiring employee in appreciation of past services constitutes taxable compensation under Section 32(A).
At what age and after how many years of service did Kim retire under the BIR-qualified multiemployer plan?
Kim retired at age 60 after serving affiliated corporations continuously for over 18 years from 1999 to 2017.
Why is the Mercedes Benz car received by Kim upon retirement excluded from donor's tax?
Transfers of property made in consideration of or in reward for past employment services are governed by income tax rules rather than donor's tax.
Learn more about these topics
1. Retirement Tax Exemption
Under Section 32(B)(6)(a) of the National Internal Revenue Code, retirement benefits received by employees of private firms under a reasonable private benefit plan approved by the Bureau of Internal Revenue are exempt from income tax. To qualify for exemption, the retiring employee must have been in the service of the same employer for at least ten years, must be at least fifty years of age at retirement, and must not have previously availed of tax-exempt retirement benefits. Services rendered within a controlled group under a qualified multiemployer plan count toward the ten-year requirement.
2. Compensatory Retirement Gifts
Under Section 32(A) of the Tax Code, gross income includes all income derived from whatever source, including compensation for personal services in whatever form paid. When an employer grants valuable property, such as a motor vehicle, to an employee upon retirement in appreciation of long and dedicated service, the transfer is treated as additional compensation or reward for past services rather than a tax-exempt pure gift. Consequently, the fair market value of the property constitutes taxable compensation income subject to income tax, rather than donor's tax.
3. Multiemployer Retirement Plans
A BIR-qualified multiemployer retirement plan allows affiliated corporations under common ownership to maintain a unified retirement plan for employees. Under such qualified plans, employees may be transferred or detailed among affiliated companies within the controlled group without experiencing a break in employment tenure or losing accrued seniority rights. For satisfying the statutory ten-year continuous service requirement under Section 32(B)(6)(a) of the Tax Code, the aggregate years of service rendered across all participating corporate affiliates within the qualified multiemployer framework are fully recognized.