BIR Ruling [DA-125-02]

July 25, 2002 BIR RULING [DA-125-02] Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, CITIBank Tower CITIBANK Plaza Makati City Attention: Atty. Priscilla B. Valer Gentlemen : This refers to your letter dated July 11, 2002 stating that Reckitt Benckiser Philippines, Inc. (RBPI) has been going through some serious business reverses; that in order to stem impending losses and resuscitate the financial health of the business, RBPI is undergoing some cost reduction measures; that one of such measures was to streamline its operations by reorganizing its operations and reducing its headcount; that the reorganization will result in the redundancy and termination of employees, as listed in the Annex A, and that the terminated employees will be paid separation benefits consisting of: (1) Separation pay equivalent to three (3) months salary for 1 year of service plus one and a half (1) months salary of for every year of service in excess of 1 year; and (2) Vested retirement benefits under the existing retirement plan, as applicable. Based on the foregoing representations, you now request confirmation of your opinion that "(1) The separation benefits granted to the affected employees are exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(1)) of the Tax Code; and "(2) The expenses incurred by RBPI in providing the separation benefits are deductible from gross income for being an ordinary and necessary trade or business expense pursuant to Section 34(A)(1)(a)(i) of the Tax Code." In reply, please be informed that under Section 32(B)(6)(b) of the 1997 Tax Code, 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 shall not be included in gross income and shall be exempt from taxation regardless of age and length of service. This Office has had several occasions to rule that the 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. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. On the bases of the two (2) afore-cited conditions, this Office holds that the separation of the employees from RBPI due to redundancy and/or retrenchment is beyond their control. Accordingly, any and all amounts received by said employees as a result thereof, are exempt from income tax and consequently from withholding tax prescribed in Section 79 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. ( BIR Ruling Nos. 105-96 dated October 15, 1996; 082-92 dated March 17, 1992; and 088-96 dated August 6, 1996 ). Moreover, the commutation and payment of unused vacation leave credits are likewise not subject to income tax and, consequently, to withholding tax. ( Commissioner of Internal Revenue vs. Court of Appeals & Efren P. Castaeda, GR 96016 prom. October 17, 1991 ) Finally, the expenses incurred by RBPI in providing the said benefits are deductible from gross income for being an ordinary and necessary trade or business expense pursuant to Section 34(A)(1)(a)(i) of the Tax Code of 1997. 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service