BIR Ruling [DA-041-02]

March 07, 2002 BIR RULING [DA-041-02] Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Ms. Marivic C. Espao Tax Partner Gentlemen : This refers to your letter dated February 26, 2002 requesting for a ruling on the tax consequences relative to the separation benefits to be paid to the employees of Intel Philippines Manufacturing, Inc. (IPMI) as a result of the implementation of the Philippine Site Consolidation Program (PSCP). It is represented that IPMI was incorporated on April 8, 1976; that in its 26 years of existence in the country it has firmly established itself as a technology-driven but people-oriented company; that it has multi-billion peso investments in plant structure and state-of-the-art semiconductor equipment and process; that it is commendable for its pioneering, untiring and consistent efforts in bringing out the Filipino's capabilities, motivating them to excel and create products that are truly world-class; that it has recently been determined that the operations of IPMI in Makati is not cost-efficient as its manufacturing operating cost is about twice as much as that of its affiliate, Intel Technology Philippines, Inc. (ITPI), a company registered with the Philippine Economic Zone Authority and located at Cavite; that in order to increase Philippine site's global competitiveness and improve over-all efficiency of Intel operations, as a group, IPMI has decided to consolidate its business operation with ITPI through the implementation of the so-called PSCP; that PSCP aims to bring down the operating costs of IPMI and consequently, improve the capability and enhance the efficiency of ITPI's present business operation; that under the program, the products currently being assembled and tested by IPMI will be transferred to ITPI; that IPMI will implement PSCP as follows: A. IPMI will subcontract operations of its Assembly Division to a qualified third party entity; B. IPMI will transfer its Site Support Groups to ITPI; and C. IPMI will transfer its Test Division operations to ITPI. that with the planned consolidation, IPMI and ITPI have evaluated the manpower requirements for the assembly and testing operations to be transferred to the Cavite plant; that some employees of IPMI will be absorbed by ITPI without loss of tenure and retaining their present pay and benefits; that their original date of hire by IPMI will be considered for purposes of determining their tenure; that ITPI will undertake the process of selecting from the group of IPMI employees who have expressed interest to be transferred to Cavite and this will be done based on a determined set of criteria, such as demonstrated skills and performance required in the Cavite operations; that employees who will not be absorbed will be separated by IPMI; and that these employees are classified into three groups, namely: 1. Employees with no available positions in ITPI; 2. Employees with available positions in ITPI but do not meet criteria established by ITPI; and 3. Employees with available position in ITPI but did not express interest in being absorbed by ITPI due to considerable inconvenience expected from the new site of employment. In reply, please be informed that under Section 32(B)(6)(b) of the 1997 Tax Code, 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. This Office has had several occasions to rule that the 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. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. On the bases of the two (2) afore-cited conditions, this Office is of the position and hereby holds that the separation of the employees from service under the IPSP is beyond their control since this is the direct result of IPMI's decision to consolidate its operations with ITPI. It is not asked or initiated by the employees which is true for all the cases of employees classified above. As for employees who prefer to be separated although there are positions available for them in ITPI, they are being eased out of employment by constructive separation and the same is likewise considered not of their own making. ( BIR Ruling No. 055-85 dated April 11, 1985 ) For this people, the option to transfer may not really be viable choice considering the attendant additional cost and inconvenience of reporting to work to the Cavite plant. Such being the case, any and all amounts received by IPMI employees as a result of their separation from employment with IPMI are exempt from income tax and consequently from withholding tax prescribed in Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, as amended. ( Undated BIR Ruling [DA-051-02-03-99], Undated BIR Ruling [DA-546-09-21-99], BIR Ruling No. 105-96 dated October 15, 1996, BIR Ruling No. 379-93 dated September 20, 1993, BIR Ruling No. 082-92 dated March 17, 1992 and BIR Ruling No. 018-90 dated February 9, 1990 ) 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, (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service