BIR Ruling [DA-100-00]

February 15, 2000 BIR RULING [DA-100-00] 32 (B) (6) (b) 69-98 Joaquin Cunanan & Co . 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue, 1226 Makati City Attention: Ms . Myrna M . Fernando Partner Tax Services Gentlemen : This refers to your letter dated September 21, 1999 requesting for a ruling in behalf of your client, Lucent Technologies Philippines, Inc. (Lucent) as to whether or not the separation benefits to be paid to their employees by reason of redundancy/retrenchment are exempt from income tax and consequently from the withholding tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It is represented that Lucent is in the business of telecommunications; that its primary business involves the design, development and manufacture of communications solutions; that the intense competition among the existing players and possible threat of new entrants in the industry compel Lucent to be more focused, cost effective and responsive to the changing market; that to accomplish these objectives, the company is currently undergoing organizational structuring that involves the realignment of functions, transfers and/or abolition of positions consistent with regional and global directives to streamline operations in order to enhance efficiency and increase productivity; that as a result of this decision, a special separation package is to be given to employees whose positions have been declared redundant consisting of the following: 1. Separation pay computed at one month pay per year of service, a fraction of at least 6 months considered as one whole year, based on the salary at the date of separation. Such separation shall be in lieu of and in full settlement of any and all retirement benefits under the company retirement plan; 2. Cash equivalent of any earned and accrued vacation leave as of the date of separation; 3. Pro-rated payment of the Lucent Award and Unit Award equivalent to 12% of the Annual Earned Base Salary (6% LA and 6% UA), otherwise given only in December of each year. These are not given to employees who resign or are terminated with cause; 4. Payment of yearly service award that is otherwise scheduled to be given only on the employee's anniversary month. This payment is given only to employees who are separated due to redundancy or retrenchment even if they no longer reach their anniversary month. It is not given to employees who resign or are terminated with cause prior to reaching their anniversary month; 5. Eligibility to exercise the Global Founders Grant and the Global Stock Option Plan consistent with the guidelines on Company initiated separation. that Global Founders Grant (GFG) and Global Stock Option Plan (GSOP) are the global Lucent Employee Stock Option Plans; that GFG was granted to all eligible Lucent employees on October 1, 1996; that there exists a three-year holding period within which the employees to whom shares were granted shall remain in the employ of Lucent; that GFG is scheduled to be fully vested and stock options exercisable beginning October 1, 1999; that GSOP was granted to all eligible employees on September 1, 1998; that eligible employees are also subject to four years holding period and the GSOP stock options are scheduled to be fully vested and exercisable on September 1, 2002; that for both GFG and GSOP, upon vesting, the eligible employees may purchase shares by exercising their stock options and sell only enough shares to cover the option price; that employees may then hold on the purchased shares as investment or opt to sell the shares immediately; that both GFG and GSOP plans include a policy on the stock option status for various circumstances when employment with Lucent is terminated; that the policy states that if the employee is separated prior to the scheduled vesting date due to a company-initiated action for a cause beyond the control of the employee, there is immediate vesting upon termination; that on the other hand, if the employee resigns or is terminated with cause prior to the vesting date, the stock options will be canceled; and that on the other hand, after the stock options under GFG and GSOP have been fully vested (October 1, 1999) and September 1, 2002, respectively, an employee may still exercise his stock options even if he resigns or is terminated with cause or for reasons beyond his control but only within 90 days from the date of separation or termination. 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. llcd Since the separation of the employees is due to redundancy, and, therefore, beyond the control of the affected employees, any and all amounts received by them as a result thereof, are exempt from all taxes 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. The payment of their salaries, however, is subject to income tax and consequently to the withholding tax. (BIR Ruling No. SB-69-98 dated October 6, 1998) 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)