Santos vs. Servier Philippines, Inc.

Retirement benefits are subject to withholding tax if the retiring employee fails to satisfy the age and length-of-service requirements under Section 32(B)(6)(a) of the National Internal Revenue Code, and a "no duplication of benefits" clause in a company retirement plan precludes an employee terminated due to disease from claiming both separation pay under the Labor Code and retirement benefits under the plan.

Petitioner Ma. Isabel T. Santos, Human Resource Manager of respondent Servier Philippines, Inc. since 1991, suffered a severe alimentary allergy while on a European vacation in March 1998, resulting in a prolonged coma and confinement. After her return to the Philippines for rehabilitation, respondent requested a physical and psychological evaluation. Upon the finding that she had not fully recovered, respondent terminated her services effective August 31, 1999, under Article 284 of the Labor Code. Respondent offered a retirement package, which included disability retirement benefits under the company plan, but withheld P 362,386.87 from the P 1,063,841.76 retirement benefit for taxation purposes.

• Employment and Illness: Petitioner served as HR Manager for respondent since 1991. In March 1998, after attending a company meeting in Paris, she went on a European vacation with her family. She consumed mussels, suffered an alimentary allergy, fell into a 21-day coma, and remained in the ICU for 52 days. Respondent paid her hospitalization expenses.
• Rehabilitation and Termination: In June 1998, petitioner returned to the Philippines for continued rehabilitation, during which respondent continued paying her salaries and assisting with medical bills. On May 14, 1999, respondent requested a thorough evaluation of her condition. Her physician concluded she had not fully recovered mentally and physically, prompting respondent to terminate her employment effective August 31, 1999, pursuant to Article 284 of the Labor Code.
• Retirement Package and Deduction: Respondent offered a retirement package comprising retirement plan benefits (P 1,063,841.76), insurance pension, educational assistance, and medical/health care. However, only P 701,454.89 of the retirement plan benefit was released; the balance of P 362,386.87 was withheld for taxation purposes. The other listed benefits were also not given.
• Shift in Legal Theory: Petitioner initially sought separation pay under Article 284 of the Labor Code before the Labor Arbiter and NLRC. Before the Supreme Court, she abandoned this position, arguing she was not dismissed for disease but became disabled, thus claiming full retirement benefits under Section 4, Article V of the Retirement Plan and seeking the return of the deducted tax amount.

• Disability Retirement: Petitioner argued that her situation constituted disability rather than disease, entitling her to full disability retirement benefits under Section 4, Article V of the Retirement Plan, rather than mere separation pay under Article 284 of the Labor Code.
• Illegality of Tax Deduction: Petitioner maintained that the P 362,386.87 deducted by respondent for taxation purposes was illegal and must be returned to complete her retirement benefits.

• Procedural Bar: Respondent countered that the legality of the deduction for tax purposes could not be entertained by the Court because the issue was not raised during the early stages of the proceedings.

• Duplication of Benefits: Whether an employee terminated due to disease is entitled to both separation pay under the Labor Code and retirement benefits under the company retirement plan.
• Jurisdiction: Whether the labor tribunal has jurisdiction over the issue of illegal deduction for taxation purposes.
• Tax Exemption: Whether the retirement benefits received by the petitioner are exempt from withholding tax under the National Internal Revenue Code.

• Duplication of Benefits: Petitioner is entitled only to either separation pay or retirement benefits, not both. While retirement benefits and separation pay are not mutually exclusive as a general rule, the existence of a "No Duplication of Benefits" clause in the company's Retirement Plan precludes the employee from receiving any other benefit under the Labor Code or CBA once retirement benefits are availed of. Consequently, the benefits received by petitioner represent her retirement benefits under the Plan.
• Jurisdiction: The labor tribunal has jurisdiction over the claim for illegal deduction. The issue of whether the amount deducted for tax purposes was properly withheld is intertwined with the main issue of whether petitioner’s benefits have been fully paid. It constitutes a money claim arising from the employer-employee relationship, falling squarely within the jurisdiction of the Labor Arbiter and the NLRC under Article 217 of the Labor Code.
• Tax Exemption: The retirement benefits are subject to withholding tax. Under Section 32(B)(6)(a) of the NIRC, retirement benefits are excluded from gross income only if the retiring employee has been in the service for at least ten (10) years, is not less than fifty (50) years of age, and avails of the benefit only once. Petitioner was only 41 years old and had served for approximately eight (8) years at the time of her retirement, failing to meet the age and length-of-service requisites. The deduction made by respondent was therefore proper.

• Duplication of Benefits Doctrine — The receipt of retirement benefits does not bar the retiree from receiving separation pay, as the two serve different purposes: separation pay provides the wherewithal during the period of looking for new employment, while retirement benefits help the employee enjoy remaining years of life as a reward for loyalty. However, they become mutually exclusive if the retirement plan or CBA contains a specific prohibition against the payment of both, such as a "no duplication of benefits" clause.
• Tax Exemption Requisites for Retirement Benefits — For retirement benefits to be exempt from income tax and consequently from withholding tax, the following concurrence of elements must be proven: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) the retiring official or employee is not less than fifty (50) years of age at the time of his retirement; and (4) the benefit had been availed of only once.

• "Separation pay is a statutory right designed to provide the employee with the wherewithal during the period that he/she is looking for another employment. On the other hand, retirement benefits are intended to help the employee enjoy the remaining years of his life, lessening the burden of worrying about his financial support, and are a form of reward for his loyalty and service to the employer." — Distinguishing the nature and purpose of separation pay from retirement benefits.
• "No other benefits other than those provided under this Plan shall be payable from the Fund. Further, in the event the Member receives benefits under the Plan, he shall be precluded from receiving any other benefits under the Labor Code or under any present or future legislation under any other contract or Collective Bargaining Agreement with the Company." — The "No Duplication of Benefits" clause in the company's Retirement Plan that barred the simultaneous receipt of separation pay and retirement benefits.

• Aquino v. National Labor Relations Commission, G.R. No. 87653 — Followed. Established that the receipt of retirement benefits does not bar the retiree from receiving separation pay, as they are not mutually exclusive, unless there is a specific prohibition in the retirement plan or CBA.
• Cruz v. Philippine Global Communications, Inc., G.R. No. 141868 — Followed. Held that where a retirement plan contains a "no duplication of benefits" clause, the employee is entitled only to either separation pay or retirement benefits, but not both.
• Intercontinental Broadcasting Corporation (IBC) v. Amarilla, G.R. No. 162775 — Followed. Established that the issue of withholding tax on retirement benefits falls within labor tribunal jurisdiction as a money claim arising from employer-employee relations, and set forth the requisites for the tax exemption of retirement benefits.

• Article 284, Labor Code — Governs termination due to disease, requiring the payment of separation pay. Applied as the legal ground for petitioner's termination, which initially entitled her to separation pay.
• Section 32(B)(6)(a), National Internal Revenue Code (NIRC) — Provides for the exclusion of retirement benefits from gross income, subject to the conditions that the employee has served for at least 10 years, is at least 50 years of age, and avails of the benefit only once. Applied to determine the taxability of petitioner's retirement benefits, which were deemed taxable because she failed the age and length of service requirements.
• Article 217, Labor Code — Confers original and exclusive jurisdiction upon Labor Arbiters over all claims arising from employer-employee relations. Applied to vest the labor tribunal with jurisdiction over the illegal deduction claim, as it was intertwined with the money claim for unpaid benefits.

Consuelo Ynares-Santiago, Ma. Alicia Austria-Martinez, Minita V. Chico-Nazario, Ruben T. Reyes