BIR Ruling [DA-098-02]

May 22, 2002 BIR RULING [DA-098-02] 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 . Edwin B . Gastanes Gentlemen : This refers to your letter dated August 20, 1996 requesting for and in behalf of your client, Philippine Plaza Holdings, Inc. (the "Company"), for a ruling as to whether or not the separation of its employees under the Company's 1996 Early 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 28(b)(7)(P) of the Tax Code of 1997, as amended. It is represented that the Company is a domestic corporation which is the owner of the Westin Philippine Plaza Hotel located at the CCP Complex in Manila; that in view of the stiff competition in the hotel industry punctuated by the appearance of new and newly renovated hotels in Metro Manila, the Company has embarked on an extensive renovation of the hotel's physical premises; that the renovation resulted in the closure of several outlets, that this has resulted to an excess in personnel; that the Company studied the hotel's organizational and staffing composition and it was determined that the organizational changes resulting from the redundancy of positions and reduction of work force was necessary; that the necessity is even more pronounced as a result of the changes in the physical premises caused by the renovation and rehabilitation; that to effect the separation of excess or redundant personnel and achieve a manpower complement of a size compatible with its redefined business strategies and management objectives, the Company has decided to adopt and implement the Early Separation Program; and that the Program shall have the following features: "1. The Program shall cover all employees. 2. The Program is a one time, non-recurring and non-precedent setting program. 3. The selection of the employee to be covered by the Program belongs solely to the Company. The Company has the exclusive right, discretion and judgment to determine the employees to be covered by the Program. 4. The employee chosen by the Company will receive the following separation package: (i) Separation pay equivalent to one (1) month latest basic salary per year of service, a fraction of at least six (6) months being considered as one whole year; (ii) Gratuity pay equivalent to P5,000.00 for every year of service; (iii) Full commutation and payment of unused vacation leave credits; (iv) Full payment of the proportionate 13th month pay and mid-year bonus; (v) Payment of salaries up to the last working day. 5. Outstanding loans and obligations of the employee to the Company will be deducted from the separation/gratuity payments. In reply, please be informed that pursuant to Section 28(b)(7)(B) of the Tax Code of 1997, as amended, 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 Company covered by the Early Separation 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 72, Chapter X, Title II of the Tax Code of 1977, as amended. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service