BIR Ruling [DA-190-05]

April 21, 2005 BIR RULING [DA-190-05] Section 22 (Y); DA-100-02 Super Car Clinic Services, Inc . 869 Don Mariano Marcos Ave., Quezon City Attention: Mr. Benito U. Rivera Gentlemen : This refers to your letter dated March 10, 2004 requesting for a confirmation of your opinion that any amount received by an employee from the employer due to business closure or for any cause beyond the control of said employee is not subject to withholding tax. It is represented that effective January 31, 2004, your company ceased to be a gasoline dealer; that employees were paid separation pay due to business closure as a gasoline dealer in accordance with the number of years of employment with the company; and that you opine that separation pay is exempt from withholding/income tax and a fully deductible expense at the end of the calendar/fiscal year. In reply, please be informed that under Section 32(B)(6)(a) of the Tax Code of 1997, any amount received by an official or employee from the service of the employer as a consequence of separation of such official or employee from the service 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 abovementioned 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. Thus, considering that the separation of the employees of Super Car Clinic Services, Inc. is due to the cessation of operations as a gasoline dealer, the same connotes involuntariness, hence, any and all amounts received by the employees as separation benefits 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. (BIR Ruling No. DA-290-99 dated May 13, 1999). SaCDTA The payment of your employees backwages, 13th month pay and other benefits, in excess of P30,000.00 threshold, is subject, however, to income tax and consequently to the withholding tax. (BIR Ruling No. SB 69-98 dated October 6, 1998) Moreover, the commutation and payment of unused sick leave and vacation leave credits as well as service incentive leave pay are not subject to income tax and consequently, to withholding tax. ( CIR vs. CA & Efren P. Castaeda , GR 96016 prom. Oct. 17, 1991). This ruling is issued on the basis of the foregoing representations. 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group