BIR Ruling [DA-005-97]

January 7, 1997 BIR RULING [DA-005-97] Atlantic, Gulf & Pacific Company of Manila, Inc. 351 Gil J. Puyat Avenue Makati City Attention: Ms . Maura R . Jimenez Vice President and Controller Gentlemen : This refers to your letter dated November 20, 1996 stating that Atlantic, Gulf & Pacific Company of Manila, Inc. is a corporation duly registered with the Securities and Exchange Commission (SEC); that it is primarily organized, among others, to carry on construction on construction or improvement work; that unaudited financial reports for 1995 indicate that the Company had incurred losses in staggering amount of about P600 million; that based on the latest financial report, the Company continues to suffer losses through 1996, and if left unchecked, it may end the year with a net loss position; that faced with a financial crisis, the Company embarked on a comprehensive cost reduction program to stave off the disastrous effects of the continuance of such severe losses; that the program provided for the retrenchment of several employees to streamline the Company's organizational structure; that the Company will retrench and/or declare redundant an equivalent number of employees by using the following criteria: (a) duplication of functions and unnecessary jobs; (b) those whose productivity have been hindered because of consistent irregular attendance, chronic illness and serious offenses against company rules; and (c) those who are eligible to retire; that considering that the employees cannot be separated from service outright owing to lack of funds for separation benefits, the Company decided to first place the affected employees on temporary lay-off (TLO) status for a period of six months; that those who will not be recalled on or before the sixth month shall be deemed separated from the service, and shall be entitled to the following benefits in accordance with Article XXII of the Collective Bargaining Agreement (CBA): (a) Rank and file employees who are retireable, or with 20 years or more of service, or 60 years of age, shall be paid 26 days per every year of service; (b) Rank and file employees with less than 20 years of service, shall be paid three weeks pay or 18 days pay for every year of service in accordance with the existing CBA of the Union; and (c) Managerial employees (supervisors, managers and officers) regardless of number of years of service and whether retireable or not, shall be paid 26 days pay for every year of service; that in addition to these separation benefits, the employees will be given the cash equivalent of accumulated unused sick and vacation leave credits one month after payment of the separation pay; that on July 16, 1996, the Company implemented the temporary lay-off (TLO) program covering managerial employees; that for the rank and file employees, however, the Company was constrained to defer the implementation of the program because of the review of unresolved CBA issues then being conducted by the Secretary of labor, which was then finally resolved by the Labor Department on October 24, 1996; that in view of the persisting need to further reduce operations costs, the Company now intends to push through its retrenchment plans for rank and file employees and additional managerial employees by the end of the year; and that these employees will be granted separation benefits similar to those described above. Based on the foregoing representations, you now request confirmation of your opinion that any amount granted to your employees under the voluntary retrenchment program or early retirement program undertaken by Atlantic, Gulf & Pacific Company of Manila, Inc. in order to prevent serious business losses, including the cash equivalent of their unused vacation and sick leave credits, are exempt from income tax and consequently from the withholding tax. In reply, please be informed that pursuant to Section 28(b) (7) (B) of the Tax Code, as amended, any amount received by an official or employee or his heirs from his employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee is exempt from taxes regardless of age or length of service. The abovementioned law requires the presence of these two conditions in order that the employees benefits may be granted tax exemption: (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 employees or his heirs as a consequence of such separation. Since the separation of your employees due to organizational changes making their positions redundant and unnecessary is beyond their control, any and all amounts received by them as a result thereof are exempt from all taxes and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, 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 the withholding tax. (See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. Oct. 17, 1991) It is however, understood that this exemption does not include your payment of your employees salaries. (BIR Ruling No. 379-93 dated September 20, 1993) 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. cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)