BIR Ruling [DA-346-98]

July 27, 1998 BIR RULING [DA-346-98] Siguion Reyna, Montecillo & Ongsiako Philcom Building 8755 Paseo de Roxas Makati City Attention: Atty . Romarie G . Villonco Gentlemen : This refers to your letter dated June 24, 1998 requesting on behalf of your client, Philippine Long Distance and Telephone Company (PLDT), for a ruling as to the taxability of the separation pay package and 5-year Medical Insurance Coverage that its employees will receive as a result of their separation due to redundancy. cdti It is represented that the redundancy Program that PLDT will launch this year will follow the aspects of the program launched in 1995 except for the separation pay package; that in 1995, the separation pay was expressed purely as a percentage of monthly salary (200% of monthly salary for every year of service for those not qualified under the PLDT Retirement Plan or twelve month's salary, whichever is higher, and 100% of monthly salary for every year of service in addition to retirement benefits for those qualified under the Retirement Plan); that the proposed separation package under the present Plan is as follows: a) For those who are not qualified under the PLDT Retirement Plan 190% of basic monthly salary for every year of service or ten (10) months' salary, whichever is higher; b) For those who are qualified under the PLDT Retirement Plan 90% of basic monthly salary for every year of service in addition to retirement benefits; and c) In addition to (a) or (b) above, a 5-year Medical Insurance coverage for the redundant employee and his or her qualified dependents. that the Medical Insurance will be with a third party insurer and the premium will be paid by PLDT in one lump sum at the time the employee's service is terminated; that after the employee's termination of service, the matter of medical insurance coverage shall wholly be between the former PLDT employee and the Medical Insurer; that PLDT will not be a party to the Medical Insurance contract and its participation therein will only be that of a payor of the premiums thereof which it is obligated to pay under the Redundancy Program; and that PLDT will completely bow after the employees' separation from the service, and will not have any participation whatsoever in the Medical Insurance except in the payment of the one-time premium. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, 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 . (Emphasis supplied). 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 these two (2) conditions in order that the employee benefits may be granted tax exemptions: (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 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 employees of your client is beyond their control, any and all amounts that they will receive 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. Moreover, the terminal leave pay, i.e., the accumulated vacation and sick leave credits which is part of the tax-exempt separation pay is also exempt from tax. (see Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R No. 96016 prom. October 17, 1991) Furthermore, the 5-year Medical Insurance coverage to be paid by PLDT in one lump sum at the time the employee's service is terminated is likewise 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. cdtech Finally, the payment of their salaries, is subject to withholding tax. (BIR Ruling No. 035-93 dated January 15, 1993) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)