BIR Ruling [DA-151-01]

September 5, 2001 BIR RULING [DA-151-01] 32 (B) (6) (b) 018-2001 SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr. Joel L. Tan-Torres Gentlemen : This refers to your letter dated July 27, 2001 requesting on behalf of your client, PSI Technologies Inc. (PSI), for a ruling whether or not the separation benefits to be received by PSI's employees as a result of their separation under the Early Retirement Program are exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It appears that PSI is a corporation duly organized and existing under the laws of the Philippines; that it provides comprehensive package design, assembly and test services for power semiconductors used in computers, consumer electronics, automotive systems and industrial products; that it has been existing as a juridical entity since January 28, 1988 and employs around 3,033 workers; that due to the slump in the global semiconductor and electronics industry, PSI has been experiencing a slowdown in its business since the beginning of this year; that to cope with the situation, PSI installed necessary cost reduction measures to be able to maintain headcount such as scheduled vacation leaves, shortened workdays, compulsory leaves without pay, even a temporary shutdown of some work areas; that in spite of these measures, PSI continued to suffer from a lack of business opportunity and an excess of manpower complement; and that in light of these circumstances, PSI decided to embark on an "Early Retirement Program" with the following features: 1. The program covers all Direct Labor, Indirect Labor and exempt employees with five (5) to thirteen (13) years of service with the company; 2. Management shall have the sole prerogative to determine the employees who will be separated, with the number of employees to be separated/retired not to exceed two hundred fifty; and 3. That the separation package to be provided by the Program consists of: a) Separation benefits per year of service computed based on the amount of basic salary at the time of separation: 1) For employees with 10-13 years of service, 1.5 months pay per year of service; 2) For employees with 7-9 years of service, 1.3 months pay per year; 3) For employees with 5-6 years of service, 1.1 months pay per year of service, and b) Money value of accumulated vacation and sick leaves computed based on amount of basic salary at the time of separation. 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 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 availment of the Early Retirement Plan is beyond the control of the employees, any and all amounts that they will receive as a result thereof is exempt from income tax and consequently, from withholding tax as prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. Moreover, the terminal leave pay, i.e., the accumulated vacation and sick leave credits which is part of the tax-exempt separation pay is also exempt from tax. (BIR Ruling No. 98-91 dated June 4, 1991 citing Commissioner of Internal Revenue v. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. October 17, 1991). It is however, understood that this exemption does not include the payment of the separated employee's salaries. (BIR Ruling SB-018-2001 dated June 25, 2001). 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 as are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service