BIR Ruling [DA-246-00]

May 19, 2000 BIR RULING [DA-246-00] 32 (B) (6) (b) 69-98 Levi Strauss (Phils.), Inc. 2264 Chino Roces Avenue Extension Makati City Attention: Ms . Dina L . Abastillas Human Resources Manager Gentlemen : This refers to your letter dated March 10, 2000 requesting for a ruling 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 the redundancy is the result of Levi's Philippines Owned and Operated plant downsizing from a volume of 2.5 million units capacity per year down to 2.0 million units; that you conducted a review of LS Philippines plant viability in view of the prolonged temporary shutdown due to a decline in volume of export markets, biggest of which is Japan; that in the last two years, the company incurred high operational cost while plant employees experience loss of earnings; that the downsizing was done to ensure the company's long term viability in the face of strong external competition and its cost effectiveness; that you have identified a total of 46 sewing operations, 2 cutting operation and 1 mechanic as redundant; and that said redundant employees will be paid their accrued vacation and sick leave; pro-rated 13th and 14th month pay; redundancy pay equivalent to one month per year of service and their retirement benefits. 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 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 the salaries of the employees of Levi Strauss (Phils.), Inc. and their pro-rated 13th and 14th month, pay, 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