BIR Ruling [DA-288-96]

July 30, 1996 BIR RULING [DA-288-96] Tan and Venturanza Law Offices 2704 East Tower, Philippine Stock Exchange Center Exchange Road, Ortigas Center Pasig City Attention: Atty. R.S.E Venturanza M a d a m : This refers to your letter dated April 29, 1996 stating that your client, RMC Garments, Inc. a corporation duly organized and existing under the laws of the Philippines, engaged in the export garment business intends to terminate forty (40) of its employees by reason of retrenchment, in the light of the recent financial reverses that have resulted in losses to the company. In connection therewith, you are requesting a ruling to the effect that the separation pay to be received by the aforesaid employees is exempt from income tax. In reply thereto, please be informed that pursuant to Section 28 (b) (7) (B) of the Tax Code, as amended, any amount received by an official or employee or his heirs from his employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee is exempt from taxes regardless of age or length of service. The abovementioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemption: (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; (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of your client's employees due to retrenchment is beyond their control, any and all amounts received by them as a result thereof are exempt from all taxes and consequently from withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. The tax exemption is understood not to include the company's payment of salaries and pro-rated 13th month pay of the concerned officials and employees (BIR Ruling No. 276-93 dated January 24, 1993). Very truly yours, ALICIA B. CLEMENO Assistant Commissioner (Legal Service) By: (SGD.) ALICIA L. TOMACRUZ Head Rev. Executive Assistant Legal Service