BIR Ruling [DA-296-03]

September 8, 2003 BIR RULING [DA-296-03] 32 (B) (6) (a) Sycip Salazar Hernandez & Gatmaitan All Asia Capital Center 105 Paseo De Roxas Makati City Attention: Atty. Dante T. Pamintuan Gentlemen : This refers to your letter dated July 7, 2003 stating that Pfizer, Inc. ( Pfizer ) and Pharmacia Philippines, Inc. (Pharmacia) are both domestic corporations engaged in the pharmaceutical business; that on May 14, 2003, the Securities and Exchange Commission (SEC) approved the merger of Pfizer and Pharmacia, with Pfizer as the surviving entity, effective as of September 29, 2003; that the merger of Pfizer and Pharmacia is a consequence of the integration of the pharmaceutical business and operations of the Pfizer and Pharmacia group of companies worldwide; that this integration seeks, among others, to optimize the use of resources of these companies by eliminating duplication of effort, facilities and personnel; that these companies aim to reduce overall operating costs and business expenses, enhance their efficiency and competitiveness; that in an effort to achieve their objectives operationally during the interim period prior to the effective date of merger, Pfizer and Pharmacia are providing and will provide interim or transitional services to each other during the interim period as may be required by their operations from time to time; that the provision of these interim services by Pfizer to Pharmacia based on the latter's operational requirements have rendered and will render superfluous some positions in Pharmacia at certain times, necessitating the termination by Pharmacia of the affected employees on the ground of redundancy in phases or at various stages during the interim period; that Pharmacia has identified a total of 74 employees, for redundancy at various times during the interim period; that the first batch of employees was retrenched on May 31, 2003; that in view of the similarity in the operations and businesses of Pfizer and Pharmacia, their merger will render certain positions superfluous or unnecessary on and after the effective date of merger; that based on a preliminary evaluation, certain positions occupied by 17 employees were identified to be without a place in the streamlined organization of Pfizer , the surviving entity, after the merger, except to the extent necessary to facilitate or smoothen the shift by Pfizer and Pharmacia into integrated or merged operations during an adjustment period; that Pfizer will terminate these 17 employees in phases or at various stages during the adjustment period depending on the interim need for their respective services by Pfizer during this period; that to cushion the effect of the employment termination, (a) Pharmacia, with respect to the employees whom it retrenched or will retrench pre-merger, and (b) Pfizer , with respect to the employees whom it will retrench post-merger, will provide a separation package consisting of separation pay and other separation assistance as follows: 1. Separation pay a. 1.5 months basic pay for every year of service; b. additional 1.0 month basic pay for every year of service, contingent on the employee's achievement of certain transition goals as specified by the relevant officers of the employer (note: this is not intended to be compensation since the employee concerned will be paid his regular salary for achieving these goals; rather, this is intended to be another component of separation pay the release of which will be contingent upon the employee's continued assistance in ensuring a smooth transition to a merged operation); c. for non-sales supervisors and managers, pay-out under the employer's 2003 Annual Incentive Plan if the employee satisfies the requirements therein, including that the employment termination during 2003 should be involuntary and the employee meets certain performance criteria before and after the merger; and d. commutation of unused vacation and sick leave credits based on existing employer policy. 2. Other separation assistance a. pro-rated 13th month bonus, b. three-month extension of medical and life insurance benefits; and c. for some employees, purchase option of motor vehicle under favorable terms provided under employer car policy. Based on the foregoing representations, you now request for opinion that the separation package to be given by (a) Pharmacia to its employees whom it retrenched or will retrench in various phases pre-merger; and (b) Pfizer to its employees where it will retrench in various phases post-merger, is exempt from all taxes. In reply thereto, please be informed that Section 32(B)(6)(b) of the Tax Code of 1997 provides that 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 shall not be included from gross income and shall be exempt from taxation. This Office has already ruled 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 opinion and hereby holds that the separation of the employees, as a result of the merger between Pfizer and Pharmacia, with the former as the surviving corporation, is beyond their control and not asked or initiated by the aforesaid employees, since the retrenchment of the employees is driven by the companies aim to reduce overall operating costs and business expenses and enhance their efficiency and competitiveness. Accordingly, any and all amounts to be received by said employees as result thereof, are 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. (BIR Ruling Nos. 105-96 dated October 15, 1996; 082-92 dated March 17, 1992; 088-96 dated August 6, 1996) 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