BIR Ruling [DA-104-06]

March 13, 2006 BIR RULING [DA-104-06] 32 (B) (6) (b); DA-089-99 Puno and Puno Law Offices 12th Floor, East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Atty. Ma. Elizabeth E. Peralta-Loriega Atty. Gracejenn Vizcarra Giron Atty. Ma. Winnie R. Lardizabal Gentlemen : This refers to your letter dated January 31, 2006 requesting on behalf of your client, United Coconut Planters Bank ("UCPB"), confirmation to the effect that the separation pay, including terminal leave conversions, paid by UCPB to Mr. Antonio Cailao, then Senior Vice President ("SVP") and Chief Operating Officer ("COO") of UCPB, is excluded from gross income, and thus not subject to income tax and consequently withholding tax. It is represented that UCPB employed the services of Mr. Cailao as SVP and COO and the contract of employment has a fixed period of five (5) years commencing on September 1, 2003; that the contract stipulated that in the event the contract is pre-terminated for any reason other than a material breach of contract, UCPB shall pay Mr. Cailao's remaining gross salary appropriated for the five-year period; that on December 16, 2005 UCPB decided to pre-terminate the employment contract of Mr. Cailao because of the management's plan to reorganize UCPB; that the reorganization is for the purpose of realigning or consolidating the Good Bank functions and such other functions related and/or complementary thereto, under one head with the end view of eventually achieving the new UCPB business model; that pursuant thereto, UCPB was made to pay Mr. Cailao's remaining gross salary for thirty two months, inclusive of all accumulated terminal leave conversions, totaling to P8,845,085.00, and that you now request for the confirmation of your opinion that the pre-termination of the employment of Mr. Cailao is beyond his control and as such, the separation pay paid by UCPB to Mr. Cailao, including its vacation and sick leave pay, is excluded from gross income and consequently exempt from income tax and withholding tax pursuant to Section 32(B)(6) of the Tax Code. In reply thereto, 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 as a consequence of separation of such official or employee from the service of the employer because of death, or sickness or other physical disability or for any cause beyond the control of the said official employee shall not be included in gross income and shall be exempt from taxation. The basic issue to be resolved in this case is whether or not the pre-termination of the employment contract of Mr. Cailao by reason of UCPB's reorganization is embraced within the meaning of the phrase "for any cause beyond the control of the said official or employee" to entitle Mr. Cailao to tax exemption, as regards separation pay and all amounts received in consequence of such separation. 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. IcESaA Such being the case, and since the separation of Mr. Cailao is due to your client's restructuring/reorganization, such separation is therefore, beyond the control of said employees/workers. Hence, any and all amounts received by Mr. Cailao as a result thereof, specifically the separation pay including vacation and sick leave pay, 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 and implemented by Revenue Regulations No. 2-98. This ruling is issued based on the foregoing facts as represented. However, if it shall be found that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service