BIR Ruling [DA-385-05]

September 9, 2005 BIR RULING [DA-385-05] Sec. 32 (B) (6) (b); BIR Ruling No. 042-97; DA 165-03; & SB-033-2003 Ms. Maria Theresa M. Gratela 3-J Gumamela St., Mother Earth Subd. Talon 2, Las Pias City M a d a m : This refers to your letter dated September 6, 2005 requesting, in effect, a ruling on your entitlement to a refund of the tax withheld from your separation benefits. As represented, you worked as an accountant for Polytron Philippines Co., Inc ., a company engaged in the assembly, trading and service of audio video products. On July 30, 2005, its parent company which is based in Indonesia decided to close down its trading and assembly operations and retained its service operations due to losses incurred since 1997. As a result, you, together with other employees except service technicians, were involuntarily separated from the company. A withholding tax on compensation was deducted from your separation pay. In reply, please be informed that 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. Section 204(C) of the Tax Code of 1997 provides that the Commissioner may credit or refund taxes erroneously or illegally received provided that the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax. Provided, however, that a return filed showing an overpayment shall be considered as a written claim or refund. In view of the foregoing, this Office hereby holds that since your separation from the company was not asked or initiated by you, any and all amounts you received from your employer, Polytron Philippines Co., Inc. 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. The payment of your salaries, however, is subject to income tax and consequently to withholding tax. DTAcIa This serves as an authority for the Revenue District Office concerned to cause the refund of the taxes withheld from your separation benefits. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service