BIR Ruling [DA-370-98]

August 17, 1998 BIR RULING [DA-370-98] Venegas Shell Service Station Km. 32 North Luzon Tollway Bo. Borol II, Balagtas Bulacan Attention: Mr . Edgardo C . Venegas, Jr . Gentlemen : This refers to your letter dated May 29, 1998 requesting for a ruling that the separation benefits that your displaced employees will receive as a result of the dissolution of your service station are exempt from income tax and consequently from the withholding tax. cdt It is represented that you are a Shell gasoline service station by virtue of your dealership agreement with Pilipinas Shell Petroleum Corporation (Shell); that the dealership agreement expired last April 30, 1997; that on June 5, 1997, you received a termination letter from Shell stating that your dealership will not be renewed anymore; that last April 15, 1998, after a series of demand letters, you finally relinquished the said service station; and that you have more than 100 employees which you have to grant separation benefits. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code or 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. 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 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, any and all amounts received by your employees 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. cdta 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) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)