BIR Ruling [DA-397-98]

September 3, 1998 BIR RULING [DA-397-98] Alen International Industrial Corporation Alencor Building 41 Linaw St., Sta. Mesa Heights Quezon City Attention: Mr . Raymund U . Lingan Comptroller Gentlemen : This refers to your letter dated July 29, 1998 requesting opinion as to whether the separation benefits of personnel who have been separated as a result of the dissolution of Alen International Industrial Corporation (AIIC) are subject to the withholding tax under existing laws and jurisprudence. aisadc It is represented that on March 27, 1998, Daikin Limited of Japan and AIIC signed a Joint Venture Agreement to establish a new company whose business activity is manufacturing of airconditioning units; that the entire facility of AIIC formed part of the AIIC's equity infusion in the Joint Venture; that all manufacturing assets and office facilities of AIIC were effectively transferred to the Joint Venture; that as of July 22, 1998, Daikin-Alen Airconditioning Corporation has assumed commercial business operations of the airconditioning manufacturing business; that AIIC has separated all its workforce and to address the economic plight of its employees, AIIC gave the following separation package. NUMBER OF YEARS OF SERVICE 20 years and above 175% of present salary per year of service 15 years to less than 20 years 150% of present salary per year of service 10 years to less than 15 years 125% of present salary per year of service 1 year to less than 10 years 100% of present salary per year of service less than 1 year one month salary In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, 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 . (Emphasis supplied) 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-mentioned 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 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 the employees of AIIC is beyond their control, any and all amounts that they will receive as a result thereof, is exempt from income tax and consequently, from withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by 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. October 17, 1991) It is however, understood that his exemption does not include the payment of your employees' salaries. (BIR Ruling No. 035-93 dated January 15, 1993) 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 Deputy Commissioner (Legal and Enforcement Group)