BIR Ruling [DA-336-99]

June 4, 1999 BIR RULING [DA-336-99] R.S. Bernaldo & Associates Unit 1810 Cityland Condominium 10 Tower I 6815 Ayala Avenue cor. H. V. dela Costa Ext. Makati City Attention: Atty . Rosario S . Bernaldo Managing Partner Gentlemen : This refers to your letter dated September 24, 1998 requesting, on behalf of your client, Petron Corporation , for a ruling on the issue of whether the separation pay received by the Chairman of the Board of Petron Corporation is exempt from income tax. It is represented that in 1994, the Philippine National Oil Company (PNOC), a government-owned and controlled corporation, sold 40% of its shareholdings in Petron Corporation to Aramco Overseas Co. B.V. (Saudi Aramco) and 20% to the public and other corporate subscribers; that pursuant to the Shareholders' Agreement between PNOC and Saudi Arameo, the Chairman and a number of members of the Board of Directors of Petron Corporation shall exclusively be nominated by the Philippine Government, making their subsequent election to the Board a mere formality; that the Chairman had served Petron Corporation even prior to 1994 and was in fact first appointed in 1991 and had been serving Petron continuously for seven (7) years; that in July, 1998, upon the assumption of office of the Estrada Administration, the Chairman of Petron was informed by the Secretary of the Department of Energy that he will no longer be nominated, thereby terminating his services as Chairman of the Petron Board. In reply thereto, 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" shall be excluded from the gross income and therefore exempt from income tax, regardless of the age or length of service of the separated employee. 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 and the separation was not of his own making. We have taken note of the fact that under the terms and conditions of the Shareholders' Agreement between PNOC and Saudi Arameo and by the very nature of the office, the person occupying the position of Chairman of the Board of Petron Corporation clearly serves at the pleasure of the incumbent political authority and therefore co-terminus with the appointing authority. His replacement as Chairman of the Board on account of the change in Administration is indeed involuntary, beyond his control, and not of his own making. (BIR RULING No. 143-98 dated September 30, 1998) In view thereof, this Office is of the opinion that any amount received by the then Chairman of the Board of Petron Corporation as a consequence of his separation from the service should be excluded from his gross income; hence, exempt from income tax and consequently, from the withholding tax on compensation as provided for under Sec. 32(B)(6)(b) of the Tax Code of 1997, in relation to Sec. 79 (A) of the same Code. The payment of the Chairman's salaries, however, is subject to income tax and consequent to the withholding tax on compensation. dctai 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 from what had been represented, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group