BIR Ruling [DA-328-04]

June 17, 2004 BIR RULING [DA-328-04] 32 (B) (6) (b) DA-243-02 Lina Lavares Didulo Guiao & Leviste-Avellana Law Offices Unit 2202 Asia Tower Paseo de Roxas corner Benavidez Street Legaspi Village, Makati City Attention: Atty. Jose Leonilo V. Didulo Gentlemen : This refers to your letter dated June 10, 2004 requesting, on behalf of your client Dencios's Foods Corporation (DFC), for a ruling that separation benefits to be paid to its officers and employees who will be separated from service on account of cessation or termination of its business operations are exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It is represented that DFC is a company organized and existing under Philippine laws with office address at 176 Katipunan Extension, Blue Ridge, Quezon City; that it is primarily engaged in restaurant business; that on June 4, 2004, the stockholders and members of the Board of Directors approved to re-organize the company, completely cease its restaurant business operations, and apply with the Securities and Exchange Commission (SEC) for the conversion of its business operations into a purely holding company; that on June 10, 2004, the Securities and Exchange Commission approved its application for change in its corporate name into "One Nakpil Global Ventures, Inc." and the conversion of its business operations into a holding company; and that the cessation of its restaurant business operations will result in the termination of employment, and payment of separation benefits to all its affected officers and employees. 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 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 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. 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 separation of the officers and employees is due to cessation of business operations, and, therefore, beyond the control of the affected officers and employees, any and all amounts received by them 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, 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. 098-91 dated June 4, 1991, based on BIR vs. Castaeda and CTA, G.R. 96016, October 17, 1991 ) aSATHE The payment of their salaries, however, is subject to income tax and consequently to the withholding tax. ( BIR Ruling No. 100-2000 dated February 15, 2000 ) 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service