BIR Ruling [DA-100-02]

May 30, 2002 BIR RULING [DA-100-02] 32 (B) (6) (b) 290-99 Follosco, Morallos & Herce Law Offices Suite 1506, 15th Floor, 88 Corporate Center 141 Valero Street corner Sedeo Street Salcedo Village, Makati City Attention: Atty . Jesusito G . Morallos Gentlemen : This refers to your letter dated January 14, 2002, behalf of your client, Ms. Teresita Y. Vigan, requesting for a confirmation of your opinion that any amount received by an official or employee or by his heir 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 are not subject to withholding tax. It is represented that in a decision issued by the Supreme Court on June 28, 2001 in G.R. No. 143723 entitled "Litonjua Group of Companies, Eddie Litonjua and Danilo Litonjua vs. Teresita Vigan, your client was found to have been illegally dismissed by her employer and was awarded the following: 1. Separation pay; 2. Backwages; 3. Thirteenth month pay; 4. Service incentive leave pay; 5. Moral damages; 6. Exemplary damages; and 7. Attorney's fees. that the decision became final and executory and the case was remanded to the National Labor Relations Commission (NLRC) for execution; that based on the computation of the NLRC, your client is entitled to a monetary award of P806,803.59; that however, the employer was willing to pay only P720,363.53, the amount it arrived at after subjecting each of the items enumerated above to withholding tax; and that while your client agrees that the amount of backwages is subject to withholding tax, it is her position that the rest of the monetary award should not be subject to withholding tax. In reply thereto, please be informed that backwages, allowances and benefits constitute remunerations for services which would have been performed by the said employee during the period of her dismissal from the service which the National Labor Relations Commission has ruled to be illegal. Thus, your client should report as income and pay the corresponding income taxes thereon by allocating or spreading her backwages, allowances and benefits through the years from her illegal dismissal to her actual reinstatement. Said backwages are subject to withholding tax on wages ( BIR Ruling No. 057-83 dated April 12, 1983 ). Under Section 32(B)(6)(a) and (b) of the Tax Code of 1997, any amount received by an official or employee from the service of 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. Thus considering that the separation of Ms. Teresita Vigan is due to the aforecited illegal dismissal case, the same connotes involuntariness, hence, any and all amounts received by her as separation benefits 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. ( BIR Ruling No. DA-290-99 dated May 13, 1999 ). The payment of Ms. Vigan's backwages, 13th month pay and other benefits, in excess of the P30,000.00 threshold, is subject, however, to income tax and consequently to the withholding tax. (BIR Ruling No. SB 69-98 dated October 6, 1998) Moreover, the commutation and payment of unused sick leave and vacation leave credits as well as the service incentive leave pay are not subject to income tax and consequently, to withholding tax ( CIR vs . CA & Efren P . Castaeda , G.R. 96016 prom. Oct. 17, 1991 ). In addition, the award of moral and exemplary damages are not subject to withholding tax, being not considered a taxable income within the purview of Section 31 of the Tax Code of 1997. Neither the attorney's fees, the same being merely a reimbursement of your client's expenses or advances in the course of litigation. 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