BIR Ruling [DA-245-00]

May 19, 2000 BIR RULING [DA-245-00] 32 (B) (6) (B) 68-98 DHL Worldwide Express P.O. Box 4995 Makati Central Post Office 1289 Makati City Attention: Ms . Florliza V . Dijamco Finance Manager and Mr . Dennis Grover General Manager Manila Hub Gentlemen : This refers to your letter dated December 6, 1999 requesting for a ruling that the separation benefits to be paid to your employees due to the closure of your regional hub in the Philippines are exempt from income tax and consequently from the withholding tax. It is represented that DHL Aviation Philippines, Inc. is terminating the employment of a group of employees effective March 5, 2000 due to the course of your regional hub in the Philippines; that the closure is a result of operating difficulties arising from technical aviation issues with your partner airline, Continental Micronesia; that an exhaustive search for a suitable replacement aviation partner in the Philippines has unfortunately proved unsuccessful; that DHL has no alternative but to relocate your Hub outside the Philippines; and that the terminated employees will receive the following severance benefits package: 1. Two (2) months' final basic salary per year of service with a minimum benefit of six (6) months final basic salary; 2. Cash commutation of unused vacation leave credits for the year; 3. Cash commutation of unused sick leave credits; 4. Pro-rated 13th month pay; 5. Continuation of the current health care benefits covering employee and their eligible dependents for one year; 6. An additional three (3) months final basic salary provided the employee meets the service standards of 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 employees 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. ESCcaT 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 presence of your employees is due to the closure of your regional hub in the Philippines, and, therefore, beyond your 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' salaries, and the pro-rated 13th month pay, in excess of P30,000.00, however, is subject to income tax and consequently to the withholding tax. (BIR Ruling No. SB-69-98 dated October 6, 1998) 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. TAHCEc Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service