BIR Ruling [DA-043-97]

January 29, 1997 BIR RULING [DA-043-97] Siguion Reyna, Montecillo & Ongsiako 8755 Paseo de Roxas, Philcom Bldg. Makati City Attention: Atty . Jose Lis C . Leagogo Gentlemen : This refers to your letter dated January 20, 1997 requesting in behalf of your client, Philippine Long Distance Telephone Company (PLDT), for a ruling on the taxability of the benefits to be received by those who are to be separated for redundancy but not qualified to received retirement benefit under the Retirement Plan of PLDT. lexlib It is represented that PLDT had embarked on an employee reduction scheme due to redundancy as a result of the following: 1) Technological changes, i.e., conversion of electro-mechanical Step by Step, AKD, EMD, Crosspoint, Crossbar to new and modern digital switches; 2) Decrease in workload of employees in exchanges because of cut-overs (i.e., transfer of line loading to other exchanges); 3) Transfer of toll equipment and operations to other areas or decrease in volume of operator handled calls; 4) Computerization and other related information technological changes; 5) Process changes or reorganization whereby functions of employees are absorbed by other employees resulting in excess personnel; 6) Executive positions rendered redundant due to reorganization as well as those occupying staff positions; 7) Secretaries, staff assistants, other personnel directly working in the offices of Executives or officers who have already retired, resigned or have been redundant. that employees who are to be separated but not qualified under the PLDT Retirement Plan were supposed to receive Separation Pay equivalent to two (2) months for every of service; that PLDT has decided to amend the separation pay benefit that the employees not qualified under its Retirement Plan will receive as follows: Redundancy Program 1997 Redundancy/ December 1995 Manpower Reduction December 1996 Program For those without retirement benefits (less than 15 years) monthly basic salary x whichever is higher: length of service x monthly basic salary 200% x length of service x 200% or 12 months salary In reply thereto, 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 by such official or employee from the service of the employer due to death, sickness or 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 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 abovementioned law requires the presence of these two (2) two conditions in order that the employee benefits may be granted tax exemptions (1) the employer is separated from the service of 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 the withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code, as amended by the Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. Moreover, the terminal leave pay, i.e., the accumulated vacation and sick leave credits which is part of the tax-exempt separation 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, 1997). cdt The payment of their salaries, however, is subject to withholding tax. [BIR Ruling No. 035-93 dated January 15, 1993]. Very truly yours, ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)