BIR Ruling [DA-016-00]

January 7, 2000 BIR RULING [DA-016-00] Jimenez & Associates Law Offices Suite 9002 Aurora Tower Araneta Avenue Quezon City Attention: Atty . Ramon T . Jimenez Gentlemen : This refers to your letter dated October 14, 1999 requesting on behalf of your client, Cathay Pacific Steel Corporation (CAPASCO), for a ruling as to the taxability of the separation pay package that its employees will receive as a result of their separation due to serious operational/financial reverses suffered by the said company. It is represented that CAPASCO for the past several years, particularly its steel reinforcing bar mills located in Cainta, Rizal has suffered serious operational/financial reverses causing impairment of the Company's capital and consequently, deterioration of milling equipment due to the following: (a) limited market for steel products due to the continuing crisis in the construction industry; (b) the domestic market is being flooded with dumped steel imports, aggravated by low import tariff; and (c) increasing cost of production due to very high power/energy rates; that in view of the above circumstances, two (2) of its rebar mills in Cainta, namely RBM-I and RBM-II will be shutdown completely, hence, it shall commence separation of the services of these employees effective November 15, 1999; that all employees prior to separation will be given the required 30-day notice in order to help them during this period; that the management will grant a salary advance equivalent to one (1) month; and that the management has nevertheless decided that in the interest of helping its workers due to loss of jobs, the management will (a) grant separation pay equivalent to 30 days basic pay per year of service; (b) pay accumulated, accrued benefits under the law and CBA; (c) pay proportionate amount representing 13th month pay. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, 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 . (Emphasis supplied) 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. cdlex The above-mentioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions: (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 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 your client is beyond their control, any and all amounts that they will receive as a result thereof, is exempt from income tax and consequently, from withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. Moreover, the terminal leave pay, i.e., the accumulated vacation and sick leave credits which is part of the tax-exempt separation pay is also exempt from tax. (see Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. October 17, 1991) However, the payment of the employees' salaries is subject to income tax and consequently to withholding tax. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group