BIR Ruling [DA-267-01]

December 26, 2001 BIR RULING [DA-267-01] Punongbayan & Araullo Ernst & Young International 20th Floor, Tower I, The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Ms. Marivic Espao Tax Partner Gentlemen : This refers to your letter requesting for a confirmation on behalf of your clients, INTEL PHILIPPINES MANUFACTURING INC. (IPMI) and INTEL TECHNOLOGY PHILIPPINES, INC. (ITPI), relative to the tax consequences of the separation benefits granted by IPMI and ITPI to their employees who were involuntarily separated. It is represented that both IPMI and ITPI are legal entities formed, organized and operating under the laws of the Philippines; that in view of the prevailing global recession and increasing competition, IPMI and ITPI are experiencing reduced revenues and productivity; that based on current and projected volume of the business, both companies will continue to see a downturn in their business activities; that several cost-reduction efforts, such as reduced spending, slack time management, factory shutdowns, etc., have been implemented to prevent the negative impact of the declining volume of its business; that, to complement these efforts, a review of the existing number of employees (headcount) was conducted by IPMI and ITPI; that the review showed that there are more employees than the level needed in certain jobs and areas; that as a consequence of the review, and as part of the cost-reduction program, IPMI and ITPI launched the so-called "Intel Philippines' Separation Program (IPSP)," under which the redundant positions have been determined to be redundant; that the IPSP is implemented in two (2) phases, namely: (1) the Early Bird Phase and (2) the Non-Early Bird Phase; that the guidelines that were observed in the implementation of the phases are as follows: 1. Early bird. During this phase, for the positions determined to be redundant, the separation program is offered to all employees holding these positions. The Company then identified the employees to be separated by considering several factors, including, among others, the performance of the employees. 2. Non-Early Bird. In case the reductions of employees under the Early Bird phase is less than the required number, IPMI and ITPI will additionally identify the employees to be separated from those holding positions with excess headcounts based on skill, performance and tenure. In connection therewith, you now request confirmation of your opinion that the separation pay granted to qualified employees pursuant to Intel Philippines' Separation Program (IPSP) is not subject to income tax and consequently, not subject to withholding tax. In reply, please be informed that under Section 32 (B)(6)(b) of the 1997 Tax Code, 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. This Office has had several occasions to rule that the 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. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. On the bases of the two (2) afore-cited conditions, this Office is of the position and hereby holds that the separation of the employees from service under the IPSP is beyond their control since this results from the evaluation made by ITPI and IPMI that the position they are holding are redundant. the IPSP is offered only to employees holding positions declared redundant. The Early Bird phase was merely introduced as a more humane approach of identifying the employees to be terminated. The identification of the employees to be terminated was ultimately made by IPMI and ITPI based on the set of criteria established. ISCaTE Such being the case, and considering that the separation of IPMI's or ITPI's employees is due to redundancy resulting from the cost-reduction program, such separation is therefore, beyond the control of the concerned employees. Accordingly, any and all amounts received by said employees 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 and implemented by Revenue Regulations No. 2-98. (Undated BIR Ruling [DA-051-02-03-99], Undated BIR Ruling [DA-546-09-21-99], BIR Ruling No. 105-96 dated October 15, 1996, BIR Ruling No. 379-93 dated September 20, 1993, BIR Ruling No. 082-92 dated March 17, 1992 and BIR Ruling No. 018-90 dated February 9, 1990) 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 Acting Assistant Commissioner Legal Service