BIR Ruling [DA-077-00]

February 2, 2000 BIR RULING [DA-077-00] Alen Service Center, Inc . 35 Malasimbo Street, Masambong SFDM, Quezon City Attention: Ms . Leticia B. Oliveros Accountant Gentlemen : This refers to your letter dated September 27, 1999 requesting for a ruling that the separation benefits to be paid to your employees for involuntary separation by reason of economic losses incurred by your company are exempt from income tax and consequently from the withholding tax. It is represented that the following employees will be given separation pay of one month salary for every year of service to the company and all the balance of their vacation leave credits: 1. Arnaldo E. Banaobra 17. Emilio C. San Diego 2. Orlando R. Brillantes 18. Julius C. Solano 3. Rodolfo Z. Beltran 19. Winifredo S. Salazar 4. Elmer O. Espiritu 20. Nestor C. Gatchalian 5. Robert C. Espiritu 21. Lorenzo M. Gelilang 6. Romeo P. Isidro 22. Marcelino D. Masmela 7. Wilfredo M. Ibanez 23. Michael C. Natural 8. Gerardo P. Leones 24. Claro B. Quiambao 9. Joel T. Lumba 25. Oscar B. Quiambao 10. Edwin C. Neri 26. Mila A. Remigio 11. Marco C. Nazul 27. Geronimo G. Rivera 12. Feloteo C. Perino 28. Manolito D. Vino 13. Renato T. Perez 29. Arnel V. Carig 14. Felix A. Ramento, Jr. 30. Freddie S. Mancile 15. Gil A. Rius 31. Benjamin J. Pineda 16. Joel S. Rapsing 32. Rodolfo V. Santos 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 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 the employees is due to economic losses, and therefore, beyond their control, any and all amounts to be received by them as a result thereof, are exempt from income tax and consequently from the 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 withholding tax (CIR vs. CA & Efren P. Castaeda, G.R. 96016, prom. Oct. 17, 1991). The payment of the salaries of Alen Service Center, Inc. employees, however, is subject to income tax and, consequently, to the withholding tax. (BIR Ruling No. SB-69-98 dated October 6, 1998) LibLex 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, 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)