BIR Ruling [DA-137-02]

August 29, 2002 BIR RULING [DA-137-02] Ms. Modesta P. Mammuad C/o Professional Life (formerly GE Life Insurance Company, Inc.) TPG Tower, 37 EDSA cor. Boni Avenue Mandaluyong City M a d a m : This refers to your letter dated May 8, 2002 stating that in July 1998, GE Capital International Holdings (GE Capital) acquired PhilAsia Life and renamed the acquired company GE Life; that in August 1999, you transferred from GE Lighting (a GE Affiliate) to GE Life (another GE Affiliate) without loss of tenure; that within the GE Affiliates, your years of service were carried forward from one affiliate to another; that GE Capital have decided in year 2000 to sell GE Life and the sale to ATR Kim-Eng Capital Partners, Inc. was executed in July 2001; that the new owners (ATR-Kim Eng) renamed GE Life to ATR Professional Life; that all former employees of PhilAsia Life absorbed by GE Life retained their employment status with ATR Professional Life including their accumulated years of service with PhilAsia/GE Life except for two former GE employees, i.e., Modesta P. Mammuad, with 11 years service from GE Philippines and 14 years service from GE Lighting or a total of 25 years service and the Human Resource Manager from GE Philippines and GE Lighting with a total of 10 years of service; that the two former GE employees were offered separation benefit payments by GE Capital (owner of GE Life) corresponding to their accumulated years of service with GE Lighting and GE Philippines plus an incentive/retention bonus for staying with GE Life until the consummation of the sale, for handling the repatriation of the proceeds of the sale, preparing and finalizing closing entries for the closure of GE Life as a GE Affiliate in the books of GE Capital and transitioning the divestment of the company to the buyer/new owner ATR Kim-Eng Capital Partners, Inc.; that the separation payments and the incentive/retention bonus offered by GE should have been paid since October when Modesta P. Mammuad accepted the separation benefits offered effective September 30, 2001; that due to some disagreements between GE Lighting, GE Philippines and GE Capital on how the separation benefit payments will be shared by each company, no payment has been made until today; that recently, after several follow ups made by Modesta P. Mammuad, GE Capital made a decision to initially absorb all the separation benefits payment in order to settle GE's commitments to the employees since resolution of the cost-sharing issue should not affect the employees and therefore will be handled separately and internally with GE; that on March 8, 2002, a Certification was issued by Professional Life (formerly GE Life Insurance Company, Inc.) certifying that you were separated and ceased to be an employee of GE when GE Life Insurance Company, Inc., a GE affiliate, was sold to ATR-KIM Capital Partners, Inc. and that you were hired by ATR Professional Life Assurance Corporation for a definite contract term of employment renewable by mutual agreement of the parties; that under the agreement, you are considered a new contract employee losing all your tenure and service years with GE; that GE Capital will advance payment and directed the officers of GE Philippines to pay the separation benefits and incentive/retention bonus not later than March 15, 2002; that GE Philippines will be reimbursed accordingly when the GE Affiliates sharing will be resolved; that GE Philippines, through the VP-Finance notified you last March 25, 2002 that the check payment is ready for pick. up; that the VP-Finance mentioned that he will levy a withholding tax based on the opinion of GE Philippines tax consultant that the payments through GE Philippines are taxable because these are not payments from their employer, GE Life; that the payment has not been effected until today because you believed and respectfully requesting confirmation from the BIR that the intended payments brought about by the separation from GE as a result of the sale of GE Life is exempt from withholding tax; and that GE Philippines, which will prepare the check payment per instruction of GE Capital (owner of GE Life which will fund the payments) would like to ensure also that there will be no tax exposure for GE Philippines. Based on the foregoing representations, you now request for ruling that the separation benefits to be paid by GE Affiliates through GE Philippines, Inc. as a result of the sale of GE Life insurance business is exempt from income tax and consequently from withholding tax. 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. Moreover, the retention bonus is given for the purpose of staying with GE Life until the consummation of the sale, for handling the repatriation of the proceeds of the sale, preparing and finalizing closing entries for the closure of GE Life as a GE Affiliate in the books of GE Capital and transitioning the divestment of the company to the buyer/new owner, ATR Kim-Eng Capital Partners, Inc. 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 is of the opinion that the separation of Modesta P. Mammuad from the service of GE Life is beyond her control since the separation is due to the sale of GE Life by the GE Capital International Holdings, Inc. to ATR-Kim Eng Capital partners, Inc. Thus, the separation of Modesta P. Mammuad is beyond her control. Accordingly, any and all amounts to be received by her, as a result thereof, is 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) . Furthermore, the tax exemption will include the company's payment for cash equivalent of accumulated vacation and sick leave credits of the said employee. (BIR Ruling No. 98-91 dated June 4, 1991, based on BIR vs. Castaeda and CTA, G.R. 96016, October 17, 1991) The payment of the employees' salaries, however, is subject to income tax and consequently to the withholding tax. ( BIR Ruling No. DA658-99 dated November 29, 1999 ) 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. DHEaTS Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service