BIR Ruling [DA-346-05]

August 11, 2005 BIR RULING [DA-346-05] 28 (B) (6) (b) Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty. Priscilla B. Valer Gentlemen : This refers to your letter dated June 21, 2005 stating that in view of the changes in the business of the IBM group worldwide and a redundancy program implemented in the Asia Pacific Region, IBM has decided to phase out the Business Consulting Services Group and terminate the employees due to redundancy; and that as a result of the termination, IBM will pay the affected employees a special separation package consisting of: 1. Separation pay equivalent to one (1) month salary for every year of service. The separation pay will be funded by the retirement plan to the extent of vested benefits and by IBM; 2. Gratuity; 3. Prorated Christmas Bonus; and 4. Unused vacation leaves. Based on the foregoing representations, you now request confirmation of your opinion that "1. The separation benefits granted to the affected employees are exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(b) of the Tax Code; and "2. The expenses incurred by IBM in providing the separation benefits are deductible from gross income for being an ordinary and necessary trade or business expense pursuant to Section 34(A)(1)(a)(i) of the Tax Code." 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 or 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. HAaDcS 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. Accordingly, this Office holds that 1. Since the separation of its employees is due to redundancy and therefore beyond their control, any amount to be received by them as a result thereof, is exempt from income tax and consequently from withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. The payment of the employees' 13th month pay and other benefits, in excess of the P30,000.00 threshold, plus their salaries, is subject, however, to income tax and consequently to the withholding tax. Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to withholding tax. ( CIR vs. CA & Efren P. Castaeda, GR 96016, prom. Oct. 17, 1991 ) 2. Finally, the expenses incurred by IBM in providing the said benefits are deductible from the gross income for being an ordinary and necessary trade or business expense pursuant to Section 34(A)(1)(a)(i) of the Tax Code of 1997. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service