BIR Ruling [DA-041-98]

February 6, 1998 BIR RULING [DA-041-98] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . M . F . A . Balili Gentlemen : This refers to your letter dated November 27, 1997 requesting for a ruling that the separation benefits to be paid by Lux Manufacturing Corporation (Lux) to its employees pursuant to its worldwide restructuring program are exempt from income tax and consequently from withholding tax under Section 28(b)(7)(B) of the Tax Code, as amended [now Sec. 32(B)(6)(b) of the Tax Code of 1997]. LLpr It is represented that Lux is a domestic corporation engaged in the business of manufacturing; that it is a subsidiary of AB Electrolux, a corporation doing business and existing under the laws of Sweden; that in order to achieve long term financial goals, the Board of Directors of AB Electrolux has authorized a restructuring program aimed at achieving viability in the worldwide market; that the restructuring program will be implemented over a two-year period and consequently will involve the shutdown of about twenty-five (25) plants, fifty (50) warehouses, and a reduction in the present number of employees by about 12,000 worldwide; that at present, several factories of the Group are under-utilized; that therefore, necessary cuts must be made with the least profitable areas to prevent redundancy, sustain financial viability and improve performance in the worldwide market; that the factory of Lux in the Philippines is among those to have been studied and considered under-utilized; that as a result, Lux will implement a retrenchment program and provide affected employees with a reasonable separation benefit/package. In reply, please be informed that under Section 28(b)(7)(B) of the Tax Code, as amended [now Sec. 32(B)(6)(b) of the Tax Code of 1997], any amount received by an official or employee or by 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 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 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. In other words, the separation must not be of his own making or choice. Since the separation of the employees of Lux is beyond their control, any and all amounts to be received by them from the company as a result thereof, are exempt from all taxes and consequently from withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code, as amended and by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended [now Sec. 79 of the Tax Code of 1997]. 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. (Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 October 17, 1991) The payment of salaries and pro-rated 13th month pay, if any, of the concerned employees shall be subject to income tax and consequently the withholding tax. (BIR Ruling No. 384-93 dated September 28, 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, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)