BIR Ruling [DA-243-02]

December 18, 2002 BIR RULING [DA-243-02] 32 (B) (6) (b) DA-100-2000 Punongbayan & Araullo 20t Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Mr. Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated October 16, 2002 requesting, on behalf of your client Aegon Life Insurance (Philippines), Inc. (AEGON), for a ruling that the separation benefits to be paid to its officers and employees who will be separated from service on account of the cessation or termination of its business operations are exempt from income tax and consequently from the withholding tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It is represented that Aegon is a company duly organized and existing under Philippine laws, duly licensed by the Insurance Commission to engage in life insurance business in the Philippines with business address at the 30th Floor, LKG Tower, 6801 Ayala Avenue, Makati City; that on September 12, 2002, AEGON entered into an Assumption Reinsurance Agreement (ARA) with Paramount Union Insurance Corporation (Paramount Union) wherein the latter assumed all of AEGON's insurance liabilities arising from AEGON insurance policies as of closing date; that with the execution of the ARA, AEGON's rights and liabilities with respect to its Philippine life insurance business were assumed by Paramount Union, thereby resulting in the termination of AEGON's business activities in the Philippines; and that the termination of AEGON's business in the Philippines would necessarily result in the dismissal of all its employees. SDAaTC 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. 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 the officers and employees is due to cessation of business operations, and, therefore, beyond the control of the affected officers and employees, any and all amounts received by them as a result thereof, are exempt from all taxes 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. The payment of their salaries, however, is subject to income tax and consequently to the withholding tax. ( BIR Ruling No. 100-2000 dated February 15, 2000 ) TCSEcI 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