BIR Ruling [DA-054-02]

March 27, 2002 BIR RULING [DA-054-02] Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue Makati City Attention: Ms. Marivic C. Espao Tax Partner Gentlemen : This refers to your letter dated March 19, 2002 requesting for a ruling on the tax consequences relative to the separation benefits to be paid to the employees of Intel Technology Philippines, Inc. (ITPI) as a result of the implementation of the Philippine Site Consolidation Program (PSCP). It is represented that in line with the plans to increase Intel's global competitiveness and improve over-all efficiency of its operations in the Philippines, the operations of Intel Philippines Manufacturing, Inc. (IPMI) will be consolidated with ITPI through the implementation of the so-called PSCP; that under the program, ITPI will assemble and test the products currently being assembled and tested by IPMI; that as a result of the PSCP, ITPI has evaluated its operations and manpower requirements after the consolidation; that in this connection, it has determined a need to declare some of its employees as redundant; that this decision will affect employees who, by the nature of their job responsibilities, are providing support services that benefit both the operations IPMI and ITPI; that with the consolidation, ITPI does not have to retain the present number of people performing these services and thus, excess headcounts have been identified; that included in this group are employees providing support services to the factories and other administrative personnel such as those belonging in the human resource department, payroll and accounting departments, etc.; that PSCP provided ITPI a rich pool of IPMI employees who have displayed remarkable performance in their jobs and expressed interest to be integrated into the Cavite operations; that to accommodate these IPMI employees, ITPI has decided to retrench employees who will be determined to be exhibiting performance below the desired levels; that for a more humane approach, ITPI will identify the positions that it will consider open for IPMI employees and offer the separation program only to employees holding these positions; that the ITPI will then identify the employees to be separated by considering several factors, including, among others, the performance of the employees; that only those selected by the company for termination will be given separation benefits; and that in case the reduction of employees is less than the required number, ITPI will additionally identify the employees to be separated from those holding positions based on skill, performance and tenure. In reply, please; be informed that under Section 32(B)(6)(b) of the 1997 Tax Code, 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 shall not be included in gross income and shall be exempt from taxation regardless of age and length of service. This Office has had several occasions to rule that the 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. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. On the bases of the two (2) afore-cited conditions, this Office is of the position and hereby holds that the separation of the employees from service under the PSCP is beyond their control since the retrenchment of ITPI employees providing support services is driven by ITPI's decision to reduce its manpower complement to a size compatible with its requirements after the consolidation. Moreover, the decision to retrench ITPI employees to provide room for IPMI employees that ITPI would like to absorb is a decision made by ITPI and not initiated by the employees. Thus, the separation of employees is due to the consolidation of the operation of IPMI and ITPI and therefore, beyond the control of the concerned separated employees. Accordingly, any and all amounts received by said employees as a result thereof, are exempt from income tax and consequently from withholding tax prescribed in Section 79 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling Nos. 105-96 dated October 15, 1996; 082-92 dated March 17, 1992; and 088-96 dated August 6, 1996). 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.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service