BIR Ruling [DA-097-02]

May 22, 2002 BIR RULING [DA-097-02] 32 (B) (6) (b) 035-93 Ponce Enrile Reyes & Manalastas Law Offices 3rd Flr. Vernida IV Bldg. 128 Leviste St., Salcedo Village Makati City Attention: Atty . Valentino V. Dionela and Atty . Pericles C. Consunji Gentlemen : This refers to your letter dated March 18, 2002 requesting for and in behalf of your client, Rizal Commercial Banking Corporation, for a ruling as to whether or not the separation of its employees under the Bank's 2002 Special Retirement 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. CIHTac It is represented that Rizal Commercial Banking Corporation is a domestic banking corporation with principal office at 333 Sen. Gil Puyat Avenue, Makati City; that as a result of the heightened competition and challenges in the banking industry, the Bank has embarked on an initiative to streamline its organization, integrate its delivery channels, reduce its operating expenses and improve its profitability; that the Bank has undertaken a program to simplify its work processes and reorganize its manpower structure to meet a staffing composition compatible to its business strategies and objectives; that as a result, certain positions have become redundant and/or superfluous as the Bank has more employees than it actually needs; that to accomplish the necessary reduction of personnel in a manner that is both fair and helpful to the employees, the Bank has decided to implement the 2002 Special Retirement Program; and that the Program shall have the following features: a) The Program shall cover all employees; b) The Program is a one-time, non-recurring and non-precedent setting program; c) The Bank reserves the exclusive right and discretion to select employee to be covered by the Program; d) The effective date of retirement of the employees shall be at the close of business hours of February 15, 2002, unless otherwise agreed upon with his/her respective Group Head. e) The employee selected by the Bank will receive the following separation package; (1) Separation pay equivalent to one (1) month of latest gross salary per year of service, a fraction of at least six (6) months being considered as one whole year, or, the retirement pay in accordance with the RCBC Employees' Retirement Plan, whichever is higher; (2) Additional pay equivalent to one-half (1/2) month of latest gross salary per year of service; (3) Full commutation and payment of unused vacation leave and sick leave credits; (4) Full payment of the proportionate 13th month pay and 17th month pay (for non-officers); g. The benefits under the Program are intended to be tax-exempt including the cash equivalent of the leave credits in accordance with the Tax Code; h. Outstanding loans and obligations of the employees to the Bank will be deducted from the separation payments; i. The benefits payable under the Program already include whatever benefits one might be entitled to under existing retirement benefits. 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 the Bank covered by the 2002 Special Retirement Program is beyond their control, any and all amounts that they will receive 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 the withholding tax. (see Commissioner of Internal Revenue vs . Court of Appeals and Efren P . Castaeda , 203 SCRA 72 [1991]) It is however, understood that this exemption does not include the salaries paid to the separated employees (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. AEScHa Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service