BIR Ruling [DA-383-06]

June 21, 2006 BIR RULING [DA-383-06] 32 (B )(6) (a); DA-114-02 Yakult Philippines, Inc . 1461 Agoncillo cor. Escoda Sts. Ermita, Manila Attention: Mr. Alberto R. Dy Sun President Gentlemen : This refers to your letter dated March 11, 2006 stating that you have a case in your company wherein a regular employee for more than 20 consecutive years of service is due for resignation due to deteriorating health condition; that he is presently suffering from Cirrhosis of the liver aggravated by some other sickness as confirmed by his attending physician; that he has already availed and consumed all of his Company Sick Leave benefits and presently on Social Security System (SSS) Sickness Leave for almost six (6) consecutive months already; that the employee would like to avail of the Company Gratuity Pay that the Company offered for resigning employees who have rendered at least five (5) years and above continuous service with the Company as provided for in your existing Collective Bargaining Agreement (CBA) with the local Union; and that considering that some resigning employee's Retirement, Gratuities and other monetary benefits may be subject to tax exemption, you now seek clarification on the following issues: 1. In the absence of any Company BIR Registered Retirement Plan, can a regular employee at the age of 57 years, who has rendered more than twenty five (25) years of service with the company, avail of early retirement benefits and be entitled to tax exemption on income as provided for under the rules on Gross Income Exemption under Section 32(B)(6)(a) of the Tax Code of 1997? 2. Can a regular rank and file employee, who suffered from complicated sickness and availed of both the Company and SSS Sickness Benefits and eventually cannot return back to work as advised by his attending physician and decided to resign and avail of the Company Gratuity Pay given to resigning employees 5 years in service and above, avail of such tax exemption under the Tax Code of 1997? In reply, please be informed of the following: 1. Under R.A. No. 7641, otherwise known as an Act Amending Article 287 of Presidential Decree No. 442, as amended, otherwise known as The Labor Code of the Philippines, by Providing for Retirement Pay to Qualified Private Sector Employees in the Absence of any Retirement Plan in the Establishment, provides, viz: "Section 1, Article 287 of Presidential Decree No. 422, as amended, otherwise known as the Labor Code of the Philippines, is hereby amended to read as follows: "Art 287. Retirement . Any employee may be retired upon reaching the retirement age established in the collective bargaining agreement or other applicable employment contract. DCHIAS In case of retirement, the employee shall be entitled to receive such retirement benefits as he may have earned under existing laws and any collective bargaining agreement and other agreements: Provided, however, that an employee's retirement benefits under any collective bargaining and other agreements shall not be less than those provided herein. In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year. xxx xxx xxx" Such being the case, the retirement benefits to be paid by Yakult Philippines, Inc. to its employee under R.A. No. 7641 are not subject to income tax and consequently, to withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997. (BIR Ruling No. DA-114-2002 dated July 2, 2002) 2. 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 pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. The phrase "for any cause beyond the control of the 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 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. Since the employee concerned is resigning from the company, hence, not beyond his control but rather voluntary on his part, it is but proper that any and all amounts to be received by him/her as a result of separation from the service are subject to income tax and consequently to 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, as amended by Revenue Regulations No. 6-2001 and 12-2001. The payment of salaries shall also be subject to income tax and consequently to withholding tax (BIR Ruling No. SB-005-2005 dated September 19, 2005). However, if the employee has complicated sickness and cannot return back to work as advised by his attending physician because his illness is aggravated by his work condition and his continued employment with the company might worsen the illness or jeopardize his/her life, any and all amounts to be received by him/her as a result of separation from the service are 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, as amended by Revenue Regulations No. 6-2001 and 12-2001, provided a medical certificate by a Public Health Authority must be shown as a proof that the employee's condition renders him no longer fit to work. ISCDEA 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service