BIR Ruling [DA-356-00]

October 5, 2000 BIR RULING [DA-356-00] 32 (B) (6) (b) 69-98 Allied Information Services of the Philippines, Inc. Don Mariano Lim Industrial Complex Alabang Zapote Road, Almanza Las Pias, Metro Manila Attention: Mr . Romeo F . J . Aquino General Manager and Mr. Celso A. Ramirez Accounting Manager Gentlemen : This refers to your letter dated June 7, 2000 requesting for a ruling that the separation benefits to be paid to the employees of Allied Information Services of the Philippines, Inc. (Allied), due to economic conditions are exempt from income tax and consequently from the withholding tax. It is represented that Allied will shut down operations on March 31, 2000 due to economic conditions, primarily due to the termination of the contract of services with your principal customer; that you were asked to continue operations until March 31, 2001 to enable your principal customer to migrate to another system; that the shutdown will result in the involuntary termination of all your employees; and that you are providing retrenchment of flat nine (9) months basic compensation pay plus one (1) month for every year of service. 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 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. The above-mention 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. AEaSTC Since the projected separation of the employees of Allied will be due to economic conditions, and therefore, beyond their control, any amount to be received by them as a consequence of said separation is 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. However, the payment of the 13th month pay and other benefits, in excess of the P30,000.00 threshold, and the salaries of Allied employee to be separated is subject to income tax and consequently to the withholding tax. (BIR Ruling No. SB-69-98 dated October 6, 1998) 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, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group