BIR Ruling [DA-138-05]

April 11, 2005 BIR RULING [DA-138-05] 32 (B) (6) (b) 69-98 Sycip Gorres Velayo & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. R. C. Vinzon Gentlemen : This refers to your letter dated February 2, 2004 requesting for a ruling in behalf of your client, Prima Mercantile, Inc.,(Prima) that the separation benefits to be paid to its president are exempt from income tax and consequently from the withholding tax. It is represented that Prima is a domestic corporation duly organized and existing under Philippine laws; that its principal office is located at 458 Quezon Avenue corner BMA Avenue, Quezon City; that it is primarily engaged in the business of buying and selling, at retail or wholesale of any goods, wares, merchandise and commodities; that due to continuous losses, Prima decided to temporarily cease its business operations starting January 1, 2005; that Ms. Lourdes Sy (Ms. Sy) has been working with Prima as President for more than forty (40) years; that with the cessation of business operation, Prima terminated the services of Ms. Sy as President of the company; and that Ms. Sy shall receive separation benefits from Prima on account of her separation from service. In reply, 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 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 the separation of Ms. Sy is due to the temporary cessation of business of Prima, and, therefore, beyond her control, any and all amounts to be received by her 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. The payment of Ms. Sy's 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. DcCEHI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group