BIR Ruling [DA-210-02]

November 14, 2002 BIR RULING [DA-210-02] 32 (B) (6) (b) 035-93 Zambrano & Gruba Law Offices 27th Floor 88 Corporate Center Valero Corner Sedeno Streets, Salcedo Village Makati City 1226 Attention: Atty. Angelo Patrick F. Advincula Gentlemen : This refers to your letter dated November 13, 2002 requesting for and in behalf of your client, Philippine National Bank (PNB), for a confirmatory ruling that PNB's special separation program partakes of the involuntary separation of an employee such that amounts received by the separated employees as a consequence thereof are exempt from the payment of income tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. CITcSH It is represented that PNB is a domestic commercial bank with principal office at PNB Financial Center, D. Macapagal Blvd., Pasay City; that PNB is classified as a large taxpayer pursuant to the regulation of this Office; that PNB has submitted its rehabilitation program to the Bangko Sentral ng Pilipinas; that in line with the rehabilitation program, PNB has decided to further rationalize its manpower complement in order to address the specific services required for increasing its competitive and productivity level; that to accomplish this objective in a manner that is both fair and helpful to the employees, PNB has decided to adopt and implement an early retirement program for 2003 (ERP); and that the ERP will have the following features: "a) Coverage extends to regular PNB officers and employees, except local hires in foreign branches/offices. Local hires as defined in the proposed omnibus policies for overseas branches/offices are excluded from the coverage of the ERP because they are instead covered under the prevailing labor laws of the host country/ies. "b) The ERP is a one-time, non-recurring and non-precedent setting program. "c) The Bank shall have the exclusive right and absolute discretion and judgment to select employees to be covered by the ERP. "d) The effective date of the actual separation of the employees may be on any day between the 3rd of February 2003 to the 30th of June 2003, extendible at the discretion of the Bank. "e) The employees selected by the Company will receive the following benefits: Separation pay of whichever is higher between Formula 1 and Formula 2 Formula 1 [Basic salary x Assigned x Years of ] LESS: [as of May 26, Vesting Service ] Amount of GSIS gratuity [1996 Multiple* before ] received for PNB service [ Privatization ] &/or its Subsidiaries [ ] (if any) [ PLUS ] -and/or- [Latest Plan x Assigned x Years of ] Other Lump Sum/ [Salary** Vesting Service ] Separation Benefits [ Multiple after ] Received from the Bank [ Privatization ] and/or its Subsidiaries [ ] (if any) Formula 2 [Latest Gross x 100% x Total ] LESS: [Monthly Years ] Amount of GSIS gratuity [Salary PNB Service ] received for PNB Service [ (before and after) ] &/or its Subsidiaries [ Privatization ] (if any) [ ] -and/or- [ ] Other Lump Sum/ [ ] Separation Benefits [ ] Received from the Bank [ ] and/or its Subsidiaries [ ] (if any) * The Assigned Vesting Multiple will range between 100% to 200% depending on the credited Years of Service ** Latest Plan Salary consists of the latest monthly basic salary and allowances which are considered integrated into the regular monthly salary Group life insurance benefit for a period of one (1) year from date of separation from service, except for expatriate personnel who opt to remain overseas. "f) All benefit under ERP are intended to be tax-exempt. "g) Outstanding loans and obligations of the employees to the Bank will be deducted from the payments from the ERP. "h) The benefits payable under the ERP shall be considered full and complete payment of separation and/or retirement benefits under the Labor Code and RA 7641 and any other policies of the Bank which are now existing or hereafter to be implemented." In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, 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. The above-mentioned law requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemptions: (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 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 the employees of the Company covered by the Program is beyond their control, any and all amounts that they will receive as a result thereof, are exempt from income tax and consequently, from the withholding tax prescribed by Section 79, Chapter VIII, 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 the withholding tax (see Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, 203 SCRA 72 [1991]). It is however, understood that this exemption does not include the salaries paid to the separated employees. (BIR Ruling No. 035-93 dated January 15, 1993) TADaCH 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