BIR Ruling [DA-243-03]

July 25, 2003 BIR RULING [DA-243-03] 32 (B) (6) (b); SB-005-2000 Abello Concepcion Regala & Cruz ACCRA Building 122 Gamboa Street, Legaspi Village Makati City Attention: Atty. Marcial G. De La Fuente and Atty. Neptali B. Salvanera Gentlemen : This refers to your letter dated December 5, 2002 requesting for a confirmation of your opinion that the separation benefits to be paid to your employees by reason of redundancy are exempt from income tax and consequently from the withholding tax. It is represented that due to the heightened competition and new challenges affecting the non-life insurance industry, First Nationwide Assurance Corporation ("FNAC") is embarking on a new strategy to integrate its business operation with Malayan Insurance Company, Inc., realign its organization with the latter, reduce its operating expenses, minimize its losses and achieve its business objectives; that as a result, certain positions were declared redundant; that FNAC was constrained to effect the separation of seventeen (17) employees effective December 31, 2002 on the ground of redundancy; and that the affected employees have already been served their respective notices and the Department of Labor and Employment (DOLE) has likewise been notified of the redundancy program of FNAC. 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. TaSEHD Since the separation of your employees is due to redundancy, and, therefore; beyond their control, any and all amounts to be received by them as a result thereof, are 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. The payment of your employees' 13th month pay and other benefits, in excess of the P30,000.00 threshold, plus their salaries, is subject, however, to income tax and consequently to the withholding tax. (BIR Ruling No. SB-017-2001 dated March 27, 2001) 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