BIR Ruling [DA-050-98]

February 10, 1998 BIR RULING [DA-050-98] Saguisag & Associates Lawyers 4045 Bigasan Street Palanan, Makati City Attention: Atty. R.P.A. Alikpala Gentlemen : This refers to your letter dated February 10, 1997 requesting for confirmation of your opinion that the separation benefits given by your client, Mondragon International Philippines, Inc. (MIPI), and its wholly-owned subsidiaries to their respective employees who have been retrenched on grounds of serious business losses and redundancy, are exempt from tax. It is represented that your client, MIPI's trading and manufacturing divisions suffered serious business losses due to the continuous poor performance of both managerial and rank-and-file employees in the following subsidiaries, namely, Mondragon Personal Sales, Inc. (MPSI), Mondragon Fashion Express, Inc. (MFEI), Mondragon Retail Distribution Corporation (MRDC), and Consumer Specialist, Inc. (CSI); that said business reversals have threatened the viability and the very survival of the entire Mondragon group of companies organized under the MIPI holding company; that MIPI's major stockholder, Mr. Jose Antonio U. Gonzalez, has decided to purchase the aforesaid subsidiaries from MIPI, a publicly-held corporation, and reorganized them under his new holding company, Magica Holdings; that the subsidiaries left under MIPI, including MIPI itself, are being reorganized in order to streamline the entire MIPI group; that MRDC, a subsidiary which has been posting modest profits, and MIPI itself, have been included in the reorganization which similarly dismissed their employees on the ground of redundancy; that the dismissed employees have been given the requisite 30-day prior notice and all the amounts due and owing to them under the law; that the required prior notice was sent to the Department of Labor and Employment (DOLE); and that the separation benefits are to be paid out of an independently-managed trust fund, without any contribution on the part of the employees. CETDHA In reply, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, 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. 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 aforementioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions, namely, (1) the employee is separated from the service of the employer due to death, sickness or other physical disability or 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. Such being the case, any amount received by the aforementioned employees are exempt from all taxes and consequently, from the withholding tax prescribed by Section 79 of the Tax Code of 1997 (then Section 72, Chapter X, Title II of the Tax Code, as amended by 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 a 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 promulgated October 17, 1991). The tax exemption is understood not to include the payment of salaries and pro-rated 13th month pay, if any, of the said employees. (BIR Ruling No. 384-93 dated September 28, 1993) TCAHES 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)