BIR Ruling [DA-050-00]

January 26, 2000 BIR RULING [DA-050-00] SYSU International, Inc . SYSU Centre 145 Panay Avenue cor. Sgt. Esguerra Quezon City Attention: Mr . William K . Sy Vice President and Ms . Rebeca Ann K . Sy VP-Finance Gentlemen : This refers to your letter dated December 7, 1999 requesting for a ruling as to the taxability of the separation pay that its employees will receive as a result of their separation due to redundancy. It is represented that the retrenchment program was resorted by your company as a result of the termination of your distributorship agreement by Novartis-Gerber Baby Foods and Kellogs Asia-Kelloggs products which comprises about 60% of your gross income. 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. The above-mentioned law requires the presence of 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 your employees 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). Finally, the payment of their salaries, is subject to withholding tax. (BIR Ruling No. 035-93 dated January 15, 1993) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group