BIR Ruling [DA-065-00]

February 1, 2000 BIR RULING [DA-065-00] Picazo Buyco Tan Fider & Santos Law Office 8th, 6th, 4th Floors, Singapore Airlines Building 138 H.V. dela Costa St., Salcedo Village, Makati City Attention: Attys . Purisimo S . Buyco and Rosell A . Molina Gentlemen : This refers to your letter dated September 2, 1999 requesting for and in behalf of your client, China Banking Corporation (CBC) for a confirmation that: "(a) The benefits to be received by the Bank's rank and file employees under the Bank's proposed Special Redundancy Program (hereinafter referred as the "Program" for brevity) to be funded out of the existing retirement fund; and "(b) The ex-gratia payment by the Bank in excess of that provided under the Employees' Retirement Plan. are exempt from income tax and that ex-gratia payment qualify as deductible expense to the Bank". It is represented that CBC has been undertaking automation and consolidation of functions, which resulted in the redeployment of affected employees; that these coupled with the slowdown in business in the banking industry prompted CBC to look into different means by which it could maximize its resources, including its manpower resources; that redundancy is one of such means; that your Program has the following features: "1) The Program is one time, non-recurring and non-precedent setting program; "2) The Bank has the exclusive right and absolute discretion and judgment to select employees to be separated on account of redundancy; "3) The definitive period within which the Program is offered and made available is from August 1, 1999 to August 31, 1999, "4) The employee selected by the Bank will receive the following separation package: Years of Service Separation package (for every year of service) 15-20 200% of monthly salary 21-25 225% of monthly salary 26 & above 250% of monthly salary and that said benefits are in excess of that provided under the Employees Retirement Plan; 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 CBC 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 7, 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) On the other hand, in computing taxable income subject to tax under Section 27(A) of Tax Code of 1997, a corporate taxpayer, like CBC is allowed to deduct from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession. [Section 34 (A)(1)(a) Tax Code of 1997] The payment of separation pay or redundancy package is a business expense that meets the following criteria for its deductibility: 1. the expense must be ordinary and necessary; 2. it must be paid or incurred within the taxable year; 3. it must be paid or incurred in carrying on a trade or business. As held in the case of CIR vs. Philippine Education Company, Inc. 99 Phil 221 (No. L-8505, May 30, 1956): "the term ordinary as used in the statutes, does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected. Furthermore, an expense will be considered necessary where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is sufficient that the expense was incurred for purposes proper to the conduct of the corporate affairs or for the purpose of realizing a profit or for minimizing a loss." Accordingly, this Office is of the opinion as it hereby holds that the ex-gratia payment by CBC of an amount over and above that provided under its BIR approved Retirement Plan shall qualify as deductible expense to CBC pursuant to Section 34(A)(1)(a) of the Tax Code of 1997. (BIR Ruling Nos. DA-504098 dated November 18, 1998 and DA-105-96 dated March 11, 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group