BIR Ruling [DA-220-98]

June 3, 1998 BIR RULING [DA-220-98] SyCip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . Jose A . Osana Partners, Tax Division and Mr . Joel L . Tan-Torres Director, Tax Division Gentlemen : This refers to your letter dated May 18, 1998 requesting for confirmation of your opinion that the benefits under the Special Separation Benefits Plan that the Philippine National Bank (PNB) will be paying to its employees whose positions will be affected by the on-going re-engineering process shall be exempt from income tax. It is represented that in order to cope with the multi-fold challenges brought about by the continued liberalized entry of foreign banks into the Philippines and the stiff competition among re-strengthened domestic banks, the Bank has determined that it is necessary to undertake a total overhaul of the Bank's structure which has become more pressing due to the volatility in the world and regional financial markets; that the Bank is currently undergoing a "re-engineering" process which will simplify the business processes, as well as the computerization of the entire banking operations; that once such re-engineering and computerization projects are completed, PNB will be able to handle greater volumes of transaction with a lower number of staff complement; that the re-engineering process will thus render certain positions as redundant and the affected employees will accordingly be separated or retired from the Bank; that it has been determined that the re-engineering process will bring down the Bank's staff level by about 2,000; and that in view of the re-engineering process, the Bank will implement the Special Separation Benefit Plan (SSBP) over a period of eighteen (18) months for the affected employees upon the latter's submission of the required documents. In reply, please be informed that Section 32(B)(6)(b) of the Tax Code of 1997, provides that "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 said official or employee" shall be exempt from taxation. The phrase "for any cause beyond the control of the 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 be initiated by him. The separation must not be of his own making [Sec. 40(f), Revenue Regulations No. 1-68; Sec. 2(b)(2), Revenue Regulations No. 60-82, as amended]. The abovequoted provision of the Tax Code of 1997 requires the presence of two conditions in order that the separation pay of an official or employee may be exempt from income tax, to wit: a. The official or employee's separation from the service of his employer is due to death, sickness or other physical disability or for any cause beyond his control; b. The employer pays separation benefits to such official or employee separated from the service of his employer or to his heirs as a consequence of such involuntary separation. Since the separation of the employees is the result of the on-going re-engineering process and computerization of bank operations which will render certain positions as redundant and which will result in the affected employees being separated, their separation from PNB is considered involuntary and beyond their control. In view of the foregoing, the benefits under the SSBP that will be paid by PNB to the affected employees, are exempt from income tax pursuant to Section 32 (B)(6)(b) of the Tax Code of 1997; and, consequently from the withholding tax prescribed by Section 79, Chapter XIII of the Tax Code of 1997, and implemented by Revenue Regulations No. 2-98. aisadc 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group