BIR Ruling [DA-051-99]

February 3, 1999 BIR RULING [DA-051-99] Ponce Enrile Reyes & Manalastas Law Office 3rd Floor, Vernida IV Bldg., Alfaro Street Salcedo Village, Makati City Attention: Atty . Regulus E . Cabote Atty . Edwin B . Gastanes Atty . Rhoda Regina Reyes-Rara Gentlemen : This refers to your letter dated December 28, 1998 in behalf of your client, Solidbank Corporation, requesting for a ruling that the separation benefits to be paid to your employees, by reason of streamlining of work processes are exempt from income tax and consequently from the withholding tax. It is represented that Solidbank Corporation is a banking corporation organized under and by virtue of Philippine laws and maintains its principal office in Makati City; that it has one hundred twelve (12) branches nationwide; that to streamline work processes and achieve productivity, the company embarked on a service enhancement program for the branches and a centralization and integration program for the corporation units; that these programs together with the implementation of automated systems resulted in a manpower complement that is in excess of actual requirements, thereby requiring the reorganization of its manpower structure to achieve a staffing composition compatible with its integrated processes and redefined business objectives; that to effect the necessary reduction of personnel, the company decided to adopt and implement the 1998 Special Separation Program for the staff which has the following features: 1. The program is intended to cover non-official employees with at least seven (7) years of service in the Company as of January 2, 1999; 2. The program is a non-recurring and non-precedent setting program which has a specific time limit commencing in November 23, 1998 and to be terminated by December 11, 1998; 3. The Program does not amend nor modify the Company's regular Retirement Plan, although the benefits payable under the Program shall already include whatever benefits one might be entitled to under the Retirement Plan; 4. The special separation package being provided by the Program is as follows: a) For those 50 years old and above with at least 15 years of service as of 2 January 1999 and for those 55 years old and above with at least 10 years of service as of 2 January 1999; Early Retirement Benefit under the CBA plus Gratuity Pay of 1.6 months per year of service Years of Service Early + Gratuity Pay = Special (As of Retirement Benefit 1.6 Separation 02 Jan. 1999) Benefit Months per year Benefit Of service 10<15 .90 + 1.6 = 2.5 15<20 1.00 + 1.6 = 2.60 20<25 1.10 + 1.6 = 2.70 25<30 1.20 + 1.6 = 2.80 30<35 1.30 + 1.6 = 2.90 (b) For those not covered under (a) above: Separation Benefit under the CBA plus Gratuity Pay of 1.6 months per year of service Years of Service Early + Gratuity Pay = Special (As of Retirement Benefit 1.6 Separation 02 Jan. 1999) Benefit Months per year Benefit (CBA) Of service 7<9 .4 + 1.6 = 2.0 9<10 .45 + 1.6 = 2.05 10<11 .85 + 1.6 = 2.45 11<12 .86 + 1.6 = 2.46 12<13 .87 + 1.6 = 2.47 13<14 .88 + 1.6 = 2.48 14 & up .89 + 1.6 = 2.49 (c) The applicable special separation payments will first be applied to the outstanding housing or multi-purpose loan and other unsettled accountabilities with the bank; (d) In addition, all other regular payments will be paid. These include salaries up to the last working day, the cash equivalent of unused vacation and sick leave credits, and holiday pay entitlements; (e) The choice of employees to be separated and their effective separation dates will be March 31, 1999; and (f) Employees will be informed of their separation date on or before February 28, 1999. Individual separation notices will be given to employees concerned within thirty (30) days prior to their actual separation date. 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 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 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. Since the separation of your employees is due to streamlining and staff reduction process and, therefore, beyond his control, any and all amounts to be received by him as a result thereof, are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter XIII, Title of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. aisadc 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)