BIR Ruling [DA-002-02]

January 03, 2002 BIR RULING [DA-002-02] 32 (B) (6) (a) & (b) 68-98 PNB Capital and Investment Corporation 3/F, PNB Financial Center Roxas Boulevard, Metro Manila Attention: Ms. Lilia G. Baun Exec. Vice Pres. & OIC Gentlemen : This refers to your letter dated December 11, 2001 requesting for a ruling that the amounts to be paid to your separated employees due to the restructuring of the company are exempt from income tax and consequently from withholding tax. It is represented that the Board of Directors of PNB Capital and Investment Corporation (PNB Capital) recently approved the reorganization of PNB Capital; that as a consequence of said reorganization, the twenty nine (29) positions were declared as redundant; that in compliance with the requirement of the Labor Code, PNB Capital has advised the affected personnel and the Department of Labor and Employment regarding this action of the Board of Directors of PNB Capital; that the retirement benefits of the affected personnel shall be taken from the retirement fund which is covered by the PNB Capital Retirement Plan duly approved by the Bureau of Internal Revenue as a reasonable private benefit plan; that under Section 2 of the PNB Capital Retirement Plan, "any Employee who may be involuntarily separated from service by the Company shall receive the separation pay as provided for by the Labor Code or similar legislation on involuntary termination or the applicable retirement benefit under the Plan, whichever is greater"; that since the PNB Capital Retirement Plan provides for a greater benefit, the provisions of the PNB Capital Retirement Plan shall apply; and that the following is then list of the separated employees: NAME 1. Lilia G. Baun 2. Cesar L. Magnaye 3. Adrion G. Castillo 4. Suidario P. Alcantara 5. Marilou N. Ranada 6. Susan F. Cruz 7. Cynthia Marissa M. Reyes 8. Jesus L. Ventura 9. Mario A. Nevado 10. Dulce B. Trinidad 11. Ramoncito C. Jimenez 12. Ruth V. Tansiongco 13. Corazon Araceli T. Aguda 14. Juanita Joy A. Ricafort 15. Ramon Cristina San Jose 16. Alvaro S. Alvero 17. Teresita B. Leano 18. Raquel C. Saavedra 19. Albert G. Manique 20. Elizabeth Vivien S. Magbata 21. Blecilla C. Sicat 22. Monica M. Barcelon 23. Ramella Jessica R. Avancena 24. Emmanuel Victor Clarino 25. Marites Q. Mendoza 26. Ruben A. Tajon 27. Jose Marticio In reply, please be informed that pursuant to Section 32(B)(6)(a) and (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 is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of 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. DaTICE The above-mentioned law requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of the employees of PNB Capital is due to its reorganization and, therefore, beyond their control, any and all amounts to be received by them as a result thereof, are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to withholding tax ( CIR vs. CA & Efren P. Castaeda , G.R. 96016, prom. Oct. 17, 1991). The payment of the separated employees' 13th month pay and other benefits, in excess of the P30,000.00 threshold, plus their salaries, is subject, however, to income tax and consequently to the withholding tax. (BIR Ruling No. SB-69-98 dated October 6, 1998) 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, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service