BIR Ruling [DA-128-00]

February 24, 2000 BIR RULING [DA-128-00] 32 (B) (6) (b) 658-99 Ms. Susan V. Cruz c/o National Steel Corporation 377 Sen. Gil J. Puyat Avenue Makati City M a d a m : This refers to your letter dated December 23, 1999 requesting for a ruling that your availment of the provisions on early retirement under the company's retirement is considered "beyond the control of the employees" under Section 32(B)(6)(b) of the Tax Code of 1997 and thus exempt from income tax and consequently from the withholding tax. It is represented that July 7, 1999, you received your salaries and benefits (net of tax) after the uncertainty of your company operation forced you to avail of the Early Retirement Plan against your will; that your company, National Steel Corporation has been in serious financial liquidity problem since the early part of 1998; that this resulted to the following painful decisions and events: 1. May 1998 Closing of Pasig Steel Plant operation leading to retrenchment of some 200 employees; 2. Moratorium of interest payments from loans from various banks for six months from June 1998 to January 1999. This led to a more serious financing problem to support the subsequent importations of their raw materials; 3. Delayed payments of matured obligations to suppliers of parts and services due to limited cash available for allocation to mostly overdue accounts; 4. Entry. of cheap imported steel products from Russia and other neighboring countries further aggravated the situation due to the strong downward pressure that these imports have done to NSC prices to compete and prevent from losing the already low market share; 5. As of end December 1998, National Steel Corp. reported a huge loss of P4.0 Billion that given the above situations and the absence of clear decision from management to address the aggravating financial problems, the same gave you strong reasons to foresee that NSC will eventually end in the situation where it is now; and that because of the above condition of NSC and your personal financial obligations, you have no other option except to involuntarily avail of the ERP so you can legally look for another job, stable enough to have a peace of mind. aSTAHD In reply, please be informed that this Office already issued-BIR Ruling DA-658-99 dated November 29, 1999 stating that the involuntary availment of the benefits of the NSC Retirement Plan is a consequence of the forced leave and the temporary closure of the company, and therefore, beyond the employees' control. Hence, any and all amounts to be received by the employees 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. This is pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. Thus, 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. Since your separation is due to your company's financial problems, forcing you to avail the benefits of the early retirement plan and, therefore, beyond your control, any and all amounts to be received by you as a result thereof, are exempt from income tax and consequently from the withholding tax. The payment of your 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 then 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)