BIR Ruling [DA-235-99]

April 15, 1999 BIR RULING [DA-235-99] A. M. Sison, Jr. & Associates Suite 2002-A Security Bank Center 6776 Ayala Avenue Makati City Attention: Atty . Antonio L . Cardio Gentlemen : This refers to your letter dated April 8, 1998 requesting in behalf of your client, Johnson & Johnson Philippines Inc. for a ruling as to the taxability of the separation pay package that its employees will receive as a result of their separation due to re-structuring of the organization and closure of its manufacturing plant operations. aisadc It is represented that Johnson & Johnson Philippines, Inc. is a corporation organized and existing under the Philippine laws; that it is engaged in business as manufacturer/wholesaler of Johnson & Johnson baby care, personal and health care products such as Johnson baby powder, Johnson baby lotion, Johnson baby oil, sanitary napkins and so forth; that to help Johnson & Johnson Philippines, Inc. withstand international and local competition brought about by trade liberalization/globalization and make its operations in the Philippines sustainable, and at the same time, benefit the end-consumers with reasonably priced quality products, the company decided to restructure its organizations, re-engineer its processes and close its manufacturing plant operations in the Philippines starting May 1999; that as a result, employees involved in manufacturing operations and those employees who are providing administrative support services (numbering about 300 employees, more or less) will be laid off; that to alleviate the impact of the termination of the affected employees and help them cope with the difficulties brought about by their separation from employment and the economic crises gripping the region, including the Philippines, they will be given separation pay consisting of: (a) three (3) months salary for every year of service (a fraction of six months is considered one full year (b) the employees vested rights in the BIR approved retirement plan (c) accumulated vacation and sick leave credits and (d) pro-rated bonuses. 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 . (Emphasis supplied). 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 these 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 your client is beyond their control, any and all amounts that they will receive as a result thereof, is exempt from income tax and consequently, from 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 terminal leave pay, i.e., the accumulated vacation and sick leave credits which is part of the tax-exempt separation pay is also exempt from tax. (see Commissioner of Internal Revenue vs. Court of Appeals and Efren Castaeda, G.R. No. 96016 pro. October 17, 1991). Finally, the payment of their salaries, is subject to withholding tax. (BIR Ruling No. 035-93 dated January 15, 1993). Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)