BIR Ruling [DA-099-02]

May 22, 2002 BIR RULING [DA-099-02] 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 Atty. Emelyn W. Corpus-Martinez and Atty. Pericles C. Consunji Gentlemen : This refers to your letter dated January 21, 2002 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 Special Reorganization Program of 1999 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 Philippine Plaza Holdings, Inc. is a domestic corporation which is the owner of the Westin Philippine Plaza Hotel located at the CCP Complex in Manila; that the Company is classified as a large taxpayer in accordance with regulations of the Bureau; that the Company undertook a Special Reorganization Program in order to achieve right sizing and to improve productivity, by attaining a staff composition compatible to prevailing business conditions and forecast; that as a result of the study conducted, it was discovered that the Company was actually overstaffed; that considering the need to implement a retrenchment/redundancy program, the Company has decided to implement the Special Reorganization Program; and that the Program shall have the following features: "1. The Program shall apply to all affected regular associates of the Hotel; 2. This is a no-recurring and non-precedent setting one (1) time program; 3. The benefits payable under the Program already include whatever benefits one might be entitled to under the Retirement Plan; 4. The special package under the Program is as follows: a. Separation Pay; One (1) month basic salary (computed on the basis of latest monthly rate) per year of service, a fraction of at least six (6) months being considered as one whole year; b. Gratuity Pay; Seven Thousand Five Hundred (P7,500) per year of service; c. Commutation and payment of unused vacation leave; d. Payment of pro-rated 13th month pay; e. Payment of salaries up to last working day; and f. Employee loans and outstanding obligation will be deducted from the separation/gratuity payments to be received. 5. Management has the absolute right and discretion to determine who shall be covered by the Program. Date of effective separation will be determined by the Management." 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 Company covered by the Special Reorganization 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service