BIR Ruling [DA-058-99]

February 5, 1999 BIR RULING [DA-058-99] Ponce Enrile Reyes & Manalastas Law Offices 3rd Flr. Vernida IV Bldg. Alfaro St., Salcedo Village 1227 City of Makati Attention: Atty . Regulus E . Cabote and Atty . Pericles C . Consunji Gentlemen : This refers to your letter dated January 8, 1999 requesting for and in behalf of your client, Philippine Associated Smelting and Refining Corporation (PASAR) for a ruling whether the separation of its employees under the Company's 1998 Employees' Separation Program would constitute involuntary separation such that amounts to be received by the separated employees as a consequence thereof are exempt from the payment of income tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It is represented that PASAR is a corporation primarily engaged in the production of copper cathodes for export principally to other Asian countries; that PASAR was duly organized under and by virtue of Philippine laws and it maintains its principal office in the Leyte Industrial Development Estate in Isabel, Leyte; that it has a branch office in Makati which provides support services needed by the company's plant; that PASAR has been experiencing financial losses for the last several years; that PASAR has huge debt obligations and servicing these obligations alone has been a burden on its financial condition resulting in deficit capital; that in view of the recent economic crisis, the volume of sale of PASAR have also tremendously decreased; that this has resulted in the worsening of PASAR's financial situation; that to cut down on expenses and achieve efficiency, PASAR has proposed an Employees' Separation Program for both its principal and branch office; that the means by which this shall be implemented shall be by reducing the number of PASAR's employees; that with the implementation of this program, the function of the separated employees shall be integrated with those who will be remaining in order to achieve a staffing composition compatible with its objectives; that to set standards for the reduction of personnel, PASAR decided to adopt and implement the 1998 Employees' Separation Program which has among others, this special features: "1. The Choice of employees to be separated and their effective separation dates will be at the exclusive discretion of the company . "2. Each Division/Department Head shall submit to the Employees' Separation Program Review Committee Secretariat, the list of employees to be covered by the Employees' Separation Program, after review by the Employees Separation Program Review Committee Secretariat. "3. The list shall be sent to the Employees' Separation Program Review Committee which due to financial limitations, the Committee shall set a scheme of priority for eligible employees." (emphasis supplied) 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 . 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 the employees of PASAR 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 commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to the withholding tax. (see Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. October 17, 1991). It is however, understood that this exemption does not include the payment of the separated employees' salaries. (BIR Ruling No. 035-93 dated January 15, 1993) 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 and Enforcement Group)