BIR Ruling [DA-035-05]

January 28, 2005 BIR RULING [DA-035-05] Bengzon Tugade & Ungson The Bengzon Law Firm 9th Floor, Ayala Life-FGU Center 6811 Ayala Avenue Makati City Attention: Atty. Manolito S. Soler and Atty. Andrew Antonio De Castro Gentlemen : This refers to your letter dated November 26, 2004 stating that your client, Professional Services, Inc. (PST) is a duly registered domestic corporation that owns and operates The Medical City Hospital (Hospital);that the Hospital has now transferred to its new world-class facility located within the Meralco Compound in Pasig City; that it wishes to elevate hospital operations to world-class standards; that the new Hospital is equipped with modern technology and equipment requiring experts to operate the same; that it has undergone the process of evaluation and for the best interest of all stockholders it came up with a difficult decision of outsourcing the affected areas in order to solve the predicament; that in line with this, PSI decided to re-engineer its personnel structure, which will definitely improve desired services to its patients; that the Compass Group and Colliers have been tapped for the outsourcing of dietary and building management services respectively in order for the Hospital to concentrate on its core competence as a hospital and increase its quality of service; that such an endeavor necessitates a restructuring of the present employment infrastructure and that various employee positions shall be rendered redundant upon implementation of the outsourcing agreements; that the program shall affect seventy-five (75) employees; that the retirement package which is over and above their Collective Bargaining Agreement (CBA) shall consist of the following perks: (1) Retirement Offer: 31 years of employment and above 150% of their salary for every year of service 20-30 130% 10-19 120% Less than 10 100% (2) 13th Month pay (pro rata until May 15, 2004) (3) One (1) month advance salary for the final month of employment (4) Commutation of Available Leave Credits (5) Medicine and Meal Allowances due as of May 15, 2004 (6) Educational Allowances as of May 15, 2005 (7) Condonation of all outstanding hospital accounts receivable (8) Extension of health benefits for principals and dependents until April 15, 2005 and that the affected employees were given their notice of termination on April 15, 2004 to be effective May 15, 2004 in compliance with the 30-day rule as prescribed by the law. EcICDT In connection therewith, you now request confirmation of your opinion that the separation benefit to be paid to the affected employees is exempt from income tax and consequently from withholding tax. In reply thereto, please be informed that 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 or for any cause beyond the control of the said official or employee is exempt from taxes regardless of age or length of service pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. 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. The law requires the presence of two (2) conditions, 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; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Accordingly, this office confirms your opinion that any and all amounts to be received by the employees of PSI who may be affected by PSI's retrenchment program are exempt from income tax and consequently from withholding tax as prescribed in Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. The payment of salaries, however, is subject to income tax and consequently to withholding tax. ( BIR Ruling No. DA165-03 dated May 14, 2003 ) 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. CacTSI Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group