BIR Ruling [DA-001-00]

January 3, 2000 BIR RULING [DA-001-00] SGV & CO . 6760 Ayala Ave. Makati City Attention: Mr . R . R . Rubio Gentlemen : This refers to your letter dated November 3, 1999 requesting for a ruling that the amounts paid by Southern Energy Mobile, Inc. (" SEMI " formerly Hopewell Mobile Power Systems Corporation) to its separated employees are exempt from income tax and consequently from withholding tax on wages. It is represented that on March 24, 1999, SEMI's sole customer, the National Power Corporation ("NPC"), served notice to pre-terminate the Rehabilitate-Operate and Transfer ("ROT") contract for the operation of the nine (9) gas turbine barges effective June 21, 1999; that this pre-termination is consistent with the provisions of the ROT contract that was effectively entered into on February 7, 1993; that the operation of these barges proved to be one of the immediate and effective solutions to the crippling energy crisis in our country during the early 1990's; that with the installation of large base loads plants, NPC has now deemed it uneconomical to maintain these barges; that as a result of NPC's decision to invoke its right to pre-terminate the contract, SEMI was constrained to terminate the employment of its employees; that SEMI's separation package consists of the following: 1. Length of Service pay equivalent to 15 months per year of service computed from the probationary hiring date or regularization date; 2. Cash commutation of earned sick leave and vacation leave and hours-in lieu (if any); 3. Pro-rated 13th and 14th month pay; and 4. Barge Hardship and Gratuity pay (equivalent to 1 month per year of service) cdll In reply, please be informed that pursuant to Section 32 (B)(6)(b) of the Tax Code of 1997, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall not be included in gross income and shall be exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of the said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. Considering that the separation of SEMI's employees is due to the termination of ROT, which was done at the option of SEMI's sole customer, the NPC, such separation is therefore beyond the concerned employees' control. Thus, any and all amounts received by SEMI's employees as a result thereof are exempt from income tax and consequently from the withholding tax under Section 79 of the Tax Code of 1997. The exemption includes, the Length of Service pay equivalent to 1.5 months per year of service computed from the probationary hiring date or regularization date, the cash commutation of earned sick leave and vacation leave and hours-in lieu (if any), and the Barge Hardship and Gratuity pay equivalent to 1 month per year of service. However, under Section 2.78.1 (B)(11) of Revenue Regulations No. 2-98, the payment of the pro-rated 13th and 14th month pay shall not be subject to income tax and consequently from withholding tax on compensation only if the total amount, together with other benefits mentioned in the sale section of Revenue Regulations No. 2-98, will not exceed P30,000.00. (DA-041-98 dated February 6, 1998) prcd Finally, it is understood that this exemption shall not include payments of salary to SEMI employees, which shall be subject to withholding tax on compensation. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, and/or any of the requirements set forth in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group