Santos v. Servier (G.R. No. 166377; November 28, 2008)

TAXABILITY OF RETIREMENT BENEFITS: MA. ISABEL T. SANTOS, represented by ANTONIO P. SANTOS, Petitioner, - versus - SERVIER PHILIPPINES, INC. and NATIONAL LABOR RELATIONS COMMISSION, Respondents.

In holding that the petitioner in Santos v. Servier Philippines, Inc. is not entitled to any tax exemption from her retirement benefits, the Supreme Court cited the fact that at the time of her retirement, petitioner was only 41 years of age and had been in the service for more or less eight (8) years. As such, the above provision is not applicable for failure to comply with the age and length of service requirements. Therefore, respondent employer cannot be faulted for deducting from petitioner’s total retirement benefits the amount of P362,386.87 for taxation purposes.
Justice Nachura wrote and is quoted below:

Clearly, the benefits received by petitioner from the respondent represent her retirement benefits under the Plan. The question that now confronts us is whether these benefits are taxable. If so, respondent correctly made the deduction for tax purposes. Otherwise, the deduction was illegal and respondent is still liable for the completion of petitioners retirement benefits.

This is not the first time that the labor tribunal is faced with the issue of illegal deduction. In Intercontinental Broadcasting Corporation (IBC) v. Amarilla, IBC withheld the salary differentials due its retired employees to offset the tax due on their retirement benefits. The retirees thus lodged a complaint with the NLRC questioning said withholding. They averred that their retirement benefits were exempt from income tax; and IBC had no authority to withhold their salary differentials. The Labor Arbiter took cognizance of the case, and this Court made a definitive ruling that retirement benefits are exempt from income tax, provided that certain requirements are met. Nothing, therefore, prevents us from deciding this main issue of whether the retirement benefits are taxable.

As discussed above, petitioner was qualified for disability retirement. At the time of such retirement, petitioner was only 41 years of age; and had been in the service for more or less eight (8) years. As such, the above provision is not applicable for failure to comply with the age and length of service requirements. Therefore, respondent cannot be faulted for deducting from petitioners total retirement benefits the amount of P362,386.87, for taxation purposes.