BIR Ruling [DA-297-00]

August 7, 2000 BIR RULING [DA-297-00] 32 658-99; 98-91 DA-297-2000 LBC Bank 809 J.P. Rizal St., Corner Zobel St. Makati City Attention: Atty . Dorylene S . Buenaventura-Yara Legal Officer Legal Department Gentlemen : This refers to your letter dated May 10, 2000 requesting for a ruling on whether the separation pay and other terminal benefits that will be received by several of your employees who will be separated in view of a reorganization program your company will undertake and those who will avail of the Early Retirement Program which your company will be offering are subject to income tax or any other government tax. It is represented that in order to prevent loss, you will undertake a reorganization program wherein forty (40) employees, more or less, will be involuntarily separated; that in order to maintain the dignity and preserve a harmonious employee-employer relationship within your company, you intend to allow certain employees to apply early retirement subject to the company's approval; and that the features of your company's early retirement program are as follows: 1) Eligible employees shall be entitled to one (1) Plan Salary. The plan salary referred hereto shall mean an amount equivalent to one-half () month's salary of the employee, plus five (5) days incentive leave and one-twelfth (1/12) of his 13th month pay for every year of service, all of which are computed based on the basic monthly salary of the employee as of his retirement date; 2) The Early Retirement Pay is computed by multiplying one (1) Plan Salary by the number of years of the employee's credited service. The credited service shall mean the number of years of continuous service reckoned from the date the employee was hired provided, that a fraction consisting of six (6) months or more shall be considered as one (1) year. 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 because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee 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. HTAIcD 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 involuntary availment of the benefits of the reorganization program and the Early Retirement Plan is a consequence of the reorganization of your company to prevent loss and, therefore beyond the employees' 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. Furthermore, the tax exemption will include the company's payment for cash equivalent of accumulated vacation and sick leave credits of the said employee. (BIR Ruling No. 98-91 dated June 4, 1991, based on BIR vs. Castaeda and CTA, G.R. 96016, October 17, 1991) The payment of the employees' salaries, however, is subject to income tax and consequently to the withholding tax. (BIR Ruling No. DA-658-99 dated November 29, 1999) 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, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group