BIR Ruling [DA-253-02]

December 19, 2002 BIR RULING [DA-253-02] Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Mr. Francisco G. Tagao Principal Gentlemen : This refers to your letter dated September 3, 2002 requesting on behalf of your client, General Electric Philippines, Inc. (GEP), for a ruling as to whether or not the termination bonus to be paid to Modesta P. Mammuad (Ms. Mammuad) are subject to income tax and consequently to withholding tax. It is represented that Ms. Mammuad was a former employee of GEP from August 14, 1974 to January 14, 1986 and GE Lighting Philippines, Inc. (GELP) from January 15, 1986 to August 1, 1999; that in July 1998, GE Capital International Holdings, Inc. (GEC) acquired PhilAsia Life and renamed the acquired company GE Life Insurance Company (GEL); that on August 3, 1999, Ms. Mammuad moved from GELP, a GE affiliate, to GEL without loss of tenure; that with respect to her employment with these GE affiliates, her years of service were carried forward from one affiliate to another; that with respect to her move from GELP to GEL, no notice for the purpose of obtaining a clearance for involuntary termination was filed with the Department of Labor and Employment (DOLE); that in 2000, GEC decided to sell its entire shareholdings in GEL to ATR Kim-Eng Partners, Inc.; that the subject sale was executed in July 2001; that the new owners of GEL renamed the company ATR Professional Life; that most of the former employees of PhilAsia Life were absorbed by GE Life and retained their employment status with ATR Professional Life including their accumulated years of service with PhilAsia/GEL; that the two former GELP and GEP employees, one of whom was Ms. Mammuad, who had served a total of 25 years of service with the GE affiliates (11 years service from GEP & 14 years service from GELP) and the other, the HR Manager, who had served a total of 10 years, were offered a special severance package as follows: First Option: (1) a lump sum payment to a rate of 1.5 for her total GE service (including 2 years at GEL); (2) an additional sum equal to 21 months of her base salary; (3) one year's protection of her stock option rights. Second Option: (1) She would receive her fully vested retirement benefits from GE for her 25 years of service; (2) A rate of 1.25 will be applied versus normal 1.0 for the payout; (3) Termination bonus of 21 months of her monthly base salary from GE; (4) 5 year stock option protection per existing GE stock option rule. that an Agreement was entered into by and between GEL and Ms. Mammuad whereby the latter shall receive a termination bonus equal to her annual base salary at the time the termination bonus is paid subject to the fulfillment of the following requirements: (a) The completion of the sale and divestment of the business to a third party; (b) Remaining actively at work within the business until the earlier of, (i) the date the employee is laid off from the business, or (ii) the date the employee is otherwise released in writing by the business; or (iii) the date of completion of the sale or known as the completion date; (c) Maintaining fully satisfactory performance up to and including the date of payment; (d) Creating a positive work environment and modeling the right behaviors in support of the sale effort. This includes, but is not limited to, fully participating and cooperating in the planning process, communicating regularly and positively with employees and providing feedback to senior management, and implementing plans in furtherance of the sale; (e) Refraining from engaging in any wrongful act, falsification of records, manipulation of accounts, violation of procedure or other misconduct; (f) Refraining from discussing participation in, or sharing documents related to this Program with anyone other than Jan Van Ekeren, CFO, GE Capital Asia Pacific, Lt., the Employee's direct manager, the Employee's Senior Human Resources Manager or the Employee's spouses or legal representative except as may be required by law (e.g., a subpoena); (g) Executing a General Release in a form to be provided by the Business on or before the time the employee becomes eligible for the final payment hereunder. that said agreement further provides that the same is not nor is it intended to be an employment contract or a guarantee of employment for any fixed period of time; that an employee accepting payments under this Agreement accepts such payment with the understanding of and in agreement with the fact that she is an at-will employee; that either the business or the employer may terminate the employee's employment at any time, without notice, for any or no reason; and that any oral or written statements or promises to the contrary are not authorized and hereby expressly disavowed. In reply thereto, please be informed that in BIR Ruling No. DA 137-2002 dated August 29, 2002, this Office has ruled that "On the bases of the two (2) afore-cited conditions, this Office is of the opinion that the separation of Modesta P. Mammuad from the service of GE Life is beyond her control since the separation is due to the sale of GE Life by the GE Capital International Holdings, Inc. to ATR Kim-Eng Capital Partners, Inc. Thus, the separation of Modesta P. Mammuad is beyond her control. Accordingly, any and all amounts to be received by her, as a result thereof, is exempt from income tax and consequently from withholding tax prescribed in Section 79 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. . . . ." CDcHSa "Furthermore, the tax exemption will include the company's payment for cash equivalent of accumulated vacation and sick leave credits of the said employee. . . . . The payment of the employee's salaries, however, is subject to income tax and consequently to the withholding tax. . . . ." While Ms. Mammuad opted the second option, meaning she would be receiving a special severance package consisting of her full vested retirement benefits from GE for her 25 years of service and the termination bonus under the aforesaid Agreement, it is clear that the sale by GEC of its entire shareholdings in GEL to ATR Kim-Eng Partners, Inc. will terminate the services of Ms. Mammuad. Thus, making her position unnecessary and the termination beyond her control. However, in order to be entitled to the termination bonus, which is part of the special severance package, for which Ms. Mammuad has opted, she has to comply with the above-mentioned requirements which is not intended to be an employment contract, otherwise if she ceases to work at GE Company or GE Capital due to transfer or promotion she shall not be eligible to receive said termination bonus. Accordingly, since the separation of Ms. Mammuad is beyond her control, any and all amounts including the termination bonus to be received by her as a result thereof shall be exempt from income tax and consequently from withholding tax prescribed in Section 79, Chapter 10, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. ( BIR Ruling No. 163-92 dated May 25, 1992 ) 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service