BIR Ruling [DA-200-02]

November 11, 2002 BIR RULING [DA-200-02] 32 (B) (6) (b) SB-69-98 S.C. Johnson and Son, Inc. 6371 Estrella Street Makati City 1200 Philippines Attention: Ms. Teresita B. Latorre Treasurer/Finance & IS Director Gentlemen : This refers to the 2nd Indorsement of Mr. Edwin B. Cosca, Chief, Large Taxpayers Assistance Division 1, dated May 15, 2001 relative to your request for a confirmatory ruling regarding exemption from withholding tax and exclusion in the gross income of the separation benefits including terminal leave pay (vacation and sick leave credits). It is represented that S.C. Johnson & Son, Inc. is now importing all our aerosol products from other subsidiaries in Asia; and that as a result, it will be implementing a Factory Restructuring Program that will declare some factory positions redundant. 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 . Since the separation of your employees is due to redundancy, and, therefore, beyond their control, any and all amounts to be received by them as a result thereof, 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. Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to withholding tax ( CIR vs. CA & Efren P. Castaeda, GR 96016, prom. Oct. 17, 1991) . The payment of the employees' salaries, however, is subject to income tax and consequently to the withholding tax. ( BIR Ruling No. SB-69-98 dated October 6, 1998 ) 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, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service