BIR Ruling [DA-348-98]

July 28, 1998 BIR RULING [DA-348-98] Rempson Marketing Corporation 878-A Aurora Blvd. Cubao, Quezon City Attention: Mr. Edgardo M. Samson President Gentlemen : This refers to your letter dated June 18, 1998 requesting for a ruling that the separation benefits that your displaced employees will receive as a result of the closure of your department store and supermarket are exempt from income tax and consequently from the creditable withholding tax. EDCTIa It is represented that you are a domestic corporation duly registered with the Securities and Exchange Commission; that you are operating a department store and supermarket at 878-A Aurora Blvd., Cubao, Quezon City; that through a board resolution, you decided to permanently close the department store and supermarket due to economic crisis attributed by obtaining market forces and economic recession (i.e., high bank rate of interest, scarcity of credit facility on long term basis., etc.) and coupled by other factors which contributes to your financial losses such as the present LRT excavation along Aurora Blvd., Cubao, Quezon City that compelled travelers, customers, clienteles to skip or avoid the area where your department store and supermarket are located and that you have more than 30 employees whom you have to grant separation benefits. 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 due to death, sickness, or other physical disability or for any cause beyond the control of said official or employee is exempt from income tax regardless of age or length of service. IcAaEH The above-mentioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions, to wit: (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 your employees was due to the cessation of your business operation which is beyond their control, any and all amounts received by them as a result thereof are exempt from all taxes and consequently from the withholding tax prescribed under Revenue Regulations No. 2-98. Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to the withholding tax ( See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. Oct. 17, 1991.) It is however, understood that this exemption does not include the payment of your employees' salaries. IECAaD 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 that as represented, then this ruling shall be considered null and void. (BIR Ruling No. 437-93 dated November 12, 1993) CTDAaE Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)