BIR Ruling [DA-350-97]

October 29, 1997 BIR RULING [DA-350-97] Filocean Export Corporation Cervantes Street, Km. 17, South Superhighway Paraaque, Metro Manila Attention: Mr . Hiromasa Nakagawa President Gentlemen : This refers to your letter dated August 25, 1997 requesting for a tax refund on the tax withheld from the separation pay granted to your employees. It is represented that your company, FILOCEAN EXPORT CORPORATION, is engaged in the manufacture/export of frozen marine products; that your company has been encountering, for the last three (3) years (from 1994 up to present), serious drawbacks despite your efforts of upholding, maintaining, and improving your operations; that the management decided to stop business operations temporarily on July 2, 1997; that due to said closure, you retrenched all your existing employees; that you granted said employees separation pay net of the withholding taxes; and that the total amount of withholding taxes remitted to the BIR through Prudential Bank-Sucat dated July 9, 1997 is Ninety Two Thousand Ten & 74/100 (P92,010.74). In reply, please be informed that pursuant to Section 28(b)(7)(B) of the Tax Code, as amended, any amount received by an official or employee or by his heirs from his employer as a consequence of separation by such official or employee from the service of the employer due to death, sickness or 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 aforementioned 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 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 is beyond their control, any and all amounts received by them as a result thereof, are exempt from income tax and consequently, from the withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. 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). The tax exemption is understood not to include the payment of salaries and pro-rated 13th month pay, if any, of the concerned employees. (BIR Ruling No. 384-93 dated September 28, 1993) A claim for refund on the taxes withheld from the separation pay granted to your employees may, however, be filed only by the latter with the Appellate Division of this Bureau. 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.) SIXTO S. ESQUIVIAS IV OIC, Assistant Commissioner (Legal Service)