BIR Ruling [DA-165-03]

May 14, 2003 BIR RULING [DA-165-03] Sec. 32 (B) (6) (b) BIR Ruling No. DA-078-00 Philippine Communications Satellite Corp. Telecoms Plaza Building 316 Sen. Gil Puyat Ave., Makati City Attention: Atty. F.L. Aujero Internal Legal Counsel Gentlemen : This refers to your letter dated April 4, 2003 requesting for confirmation of your opinion that separation benefits of your employees who may be affected by the company's retrenchment program are exempt from income tax and consequently from the withholding tax. It is represented that Philippine Communications Satellite Corporation (PHILCOMSAT) has been incurring huge losses in operations as early as 1997 and to cushion such losses, it implemented on September 1, 1996 an early retirement program which resulted to the reduction of 72 of its personnel; that the said program was reported to this Office in your letter dated July 7, 1999; that inspite of the already downsized personnel and the yearly cost-cutting measures being implemented to contain controllable expenses, the company nevertheless did not make any significant savings to offset such losses; and that to obviate the only and last option of business closure due to severe business reverses, it plans to implement another retrenchment program that would affect at least 36 personnel with at least ten (10) years of service. In reply, please be informed that 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 pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. The phrase "for any cause beyond the control of the 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 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. DTIaCS Accordingly, this Office confirms your opinion that any and all amounts to be received by the employees who may be affected by PHILCOMSAT's retrenchment program 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, as amended. The payment of salaries, however, is subject to income tax and consequently to withholding tax ( BIR Ruling No. DA-078-2000 dated February 2, 2000 ). Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service