BIR Ruling [DA-196-02]

November 5, 2002 BIR RULING [DA-196-02] 32 (B) (6) (b); 001-95 R.P. Ceniza Law Office Lapulapu Risk & Security Services, Inc. Third Floor, L & P Building Corner Herman Cortes St. & Subangdaku Highway Mandaue City Attention: Atty. Rodulfo P. Ceniza Counsel Gentlemen : This refers to your letter dated September 23, 2001 requesting for reaffirmation of the ruling rendered by Regional Director Jaime B. Santiago relative to the separation benefits received by the employees of Taiyo Yuden (Phils.) Taiyo, under the company's Special One-Time Voluntary Retirement Program. cSCTID It is represented that Taiyo Yuden (Phils.) in Mactan Export Processing Zone, Lapulapu City issued a Memorandum dated January 5, 2001 to all its employees adopting a Special One-Time Voluntary Early Retirement Program (Program); that the program was brought about by the company's cost cutting measures considering the existing economic difficulties, decrease in production orders, continuing market decline and bleak economic future; that BIR Region VII Regional Director Atty. Jaime B. Santiago rendered a legal opinion dated February 9, 2001 to the effect that the separation of the employees were considered beyond their control, thus, exempt from the payment of income tax and withholding tax; that in reply to the clarification of Director Santiago, the Regional Director of the Department of Labor and Employment, expressed his opinion that the Program may be availed of only on voluntary bases; and that in a letter dated April 3, 2001, Director Santiago revoked his earlier opinion stating that the retirement benefit is no longer exempt from the payment of withholding tax, hence, this request, anchored on the following: 1. The early retirement benefit under the Program is exempt from the withholding tax as the retirement was due to "a cause beyond their control"; 2. The Program is actually a retrenchment as buttressed by the fact that no replacements had been provided by the Company to take over and perform the duties and functions of those who were retired; 3. The program was neither initiated nor asked for by the employees and therefore not voluntary on their part; 4. The retirement benefit is not a compensation but rather a reward for the employee's years of loyal and dedicated service; and 5. Since the Labor Code is a social legislation, in case of doubt, the doubt should always be resolve in favor of the worker. 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. (emphasis supplied) 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. A careful study of the Special One-Time Voluntary Early Retirement program of Taiyo Yuden (Phils.) Inc. revealed the following: 1. All qualified employees who may be retired by the company under the program will receive only the benefits granted therein and will not be entitled to the retirement benefits provided for in the Company's regular retirement plan; 2. The program shall be effective and may be availed of only for a specific period reckoned from January 5 to 9, 2001; 3. The Company reserves the absolute right to shorten or extend the effectivity of the program as it may solely deem necessary and under such terms and conditions as it may prescribe and impose; 4. Any and all applications that may be received after January 9, 2001 or such expiration date as the Company may solely fix will not be entertained; 5. The employee concerned shall have no right or cause of action to compel the Company; 6. The retirement benefit is not tax-free nor tax-exempt, and thus, shall be subject to the appropriate tax, to be withheld by the Company; 7. The Program may be availed of on a voluntary basis within the prescribed period only; and 8. It is intended for a limited and distinct purpose and effective for a definite duration, not intended to establish any company practice or precedent. Voluntary retirement should be distinguished from optional retirement. Voluntary retirement may be considered as voluntary separation. It is in this light that this Office has previously held that benefits under a voluntary retirement are subject to tax. (Memorandum of Commissioner Misael P. Vera for the Chief, Withholding Tax Division, dated October 27, 1969) It is noted that the provisions of the Program, more particularly No. 6 and 7, provided that the benefit is not tax-free nor tax exempt, thus, shall be subject to the appropriate tax to be withheld by the Company . Furthermore, the availment of the benefits of the Program is clearly on a voluntary basis which is contrary to one of the conditions set forth under Section 32(B)(6)(b) of the Tax Code of 1997. The fact that it was the Company that finally decided whether an employee was to be separated from the service or not is of no moment; the employees voluntarily filed their application in writing within the specified time to indicate their desire and intention to avail of the benefits of the program. In BIR Ruling No. 001-95 dated January 6, 1995, it was ruled that the separation benefits to be received by the employees or officials who will apply or avail of the Voluntary Retirement program are subject to income tax and consequently to the withholding tax considering that their separation is voluntary or initiated by the employees themselves. Only separation benefits paid to employees by their employer due to their involuntary separation therefrom as contemplated under then Section 28(b)(7)(B) (now Section 32(B)(6)(b) of the Tax Code of 1997 may be exempt from income tax. Accordingly, the employees who applied for and availed the benefits of the Program cannot be considered to have been separated beyond their control. Hence, any and all amounts received by them as a consequence of the separation should have been subjected to income tax pursuant to Section 24 and consequently, to withholding tax under Section 79, Chapter XIII, Title II of the Tax Code of 1997. This reiterates the ruling issued by Regional Director Jaime B. Santiago dated March 29, 2001 holding that the employee/s who voluntarily applied for retirement under the "Special, One Time, Voluntary, Early Retirement Program" cannot be considered to have been separated beyond their control. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group