BIR Ruling [DA-401-06]

June 28, 2006 BIR RULING [DA-401-06] 32 (B) (6) (b); DA 245-00 Eli Lilly (Philippines), Inc . 32/F Wynsum Corporate Plaza 22 Emerald Avenue, Ortigas Center Pasig City Attention: Ms. Shehryar Ansari HR/Finance Director Gentlemen : This refers to your letter dated February 7, 2006 stating that Eli Lilly (Philippines), Inc. terminated the employment of a group of employees effective February 9, 2004 due to redundancy brought about by the rationalization of your organization; that this is in line with your strategic thrust to ensure the viability of your Philippine operations; that there were at least 116 employees that were affected by this action and who in turn were provided with a severance benefits package in compliance with the Labor Laws; that the severance benefits package is the sum of the following: 1. Redundancy Pay; 2. Unused vacation leave cash conversion; 3. Pro-rated final month pay; and 4. Pro-rated 13th month and Christmas bonuses and that since these benefits are regarded as involuntary separation benefits (redundancy benefits), the same are not taxable to the employees. In connection therewith, you now request for an opinion as to whether or not the separation benefits to be paid to the aforesaid employees due to the rationalization of your organization are exempt from income tax and consequently from withholding tax. cDIHES In reply thereto, please be informed that Section 32(B)(6)(a) of the Tax Code of 1997 provides 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. 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 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 termination of your employees is due to the rationalization of your organization, and, therefore, beyond their control, any and all amounts to be received by them as a result thereof, are 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, as amended. The payment of your employees' salaries, and the pro-rated 13th month pay, in excess of P30,000.00, however, is subject to income tax and consequently to the withholding tax. aSIHcT 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service