BIR Ruling [DA-232-04]

May 5, 2004 BIR RULING [DA-232-04] 32 (B) (6) (b) SB-69-98 Mr. Virgilio L. Pea 29 Meralco Avenue Pasig City, Metro Manila S i r : This refers to your letter dated February 18, 2004 requesting for a ruling to the effect that the income you received from the exercise of the stock option is exempt from the payment of applicable taxes. It is represented that you retired from IBM Philippines, Inc. effective May, 1994; that at that time you reached the age of 50 and completed almost 30 years of service; that as part of a retrenchment package, you received your retirement compensation and other benefits exempted from the applicable income taxes; that part of your 1994 compensation package at that time as the President and General Manager were IBM Corporation Stock Options which had a validity of 10 years and were therefore exercisable until February 6, 2004; that upon exercise of the option, you were allowed to purchase IBM shares at the price set at the time the options were granted; that if the market value of the share at exercise time is higher than the award price, the gain value is credited to you as income and the corresponding taxes automatically withheld at source; that you exercised said option last January 30, the proceeds of which were used to acquire IBM shares; that you would like to seek exemption from the applicable income taxes on these stock option proceeds on the basis that they were granted to you on the year of your retirement in 1994 and was part of your retirement compensation from IBM Philippines, Inc. and that the stock option granted to you had a validity period of 10 years which implies that you can avail of it after your employment with the company. 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. 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 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. (BIR Ruling No. SB-69-98 dated October 6, 1998) Considering that the stock option which had a validity of ten (10) years was also part of your retrenchment package, the income derive in the exercise thereof shall be considered part of any and all amounts received by you as a result of the said retrenchment, hence, 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. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group