BIR Ruling [DA-182-03]

June 10, 2003 BIR RULING [DA-182-03] 32 (B) (6) (a); SB23-01 Picazo Buyco Tan Fider & Santos 18th, 19th & 17th Floors, Liberty Center 104 H.V. dela Costa Street Salcedo Village, Makati City Attention: Atty. Purisimo S. Buyco and Atty. Allen R. Bauzon Gentlemen : This refers to your letter dated May 8, 2003 stating that China Banking Corporation (Bank) is undergoing reorganization, automation and consolidation of functions, which resulted to the redeployment of affected employees; that coupled with the slowdown of business in the banking industry, prompted the Bank to look into different means by which it could maximize its resources, including its manpower resources, and save on operating cost; that redundancy is one of such means; that this Special Redundancy Program has the following features: (1) The Program is a one time, non-recurring and non-precedent setting program; (2) That Bank has the exclusive right and absolute discretion and judgment to select employees to be separated on account of redundancy; (3) The definitive period within which the Program is offered and made available to the employees is from June 1, 2003 to July 31, 2003; (4) The employee selected by the Bank will receive the following separation package: Years of Service Separation Package (for every year of service) 10-20 years 200% of monthly salary 21-25 years 225% of monthly salary 26 years and above 250% of monthly salary and that said benefits is in excess of that provided under the Employees' Retirement Plan. Based on the foregoing representations, you now request confirmation of your opinion that "(1) (T)he benefits to be received by the Bank's employees under the Bank's proposed Special Redundancy Program to be funded out of the existing retirement fund are exempt from income tax and consequently from withholding tax; and "(2) (T)he ex-gratia payments by the Bank in excess of that provided under the Employees' retirement Plan qualify as deductible expense of the Bank." 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. DHcTaE 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, i.e. the separation was not of their own making. Considering that the separation of China Banking Corporation employees is beyond their control, any and all amounts to be received by them as a result thereof, are 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 ex-gratia payments incurred by China Banking Corporation in providing the said benefits are deductible from gross income for being an ordinary and necessary trade or business expense pursuant to Section 34(A)(1)(a)(i) of the Tax Code of 1997. However, separation benefits paid out of the retirement plan cannot be deducted as business expense because they were already deducted from the gross income when the company made its contribution to the Plan. 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service