BIR Ruling [DA-405-00]

November 27, 2000 BIR RULING [DA-405-00] 32 (B) (6) (b) 69-98 American Wire & Cable Co., Inc. 8508 Km. 16 South Superhighway Paraaque, Metro Manila Attention: Mr . Severino C . Landingin, Jr . Gentlemen : This refers to your letter dated July 18, 2000 requesting for a ruling that the separation benefits to be paid to the employees of American Wire & Cable Co., Inc. whose services were terminated effective July 30, 2000 due to redundancy are exempt from income tax and consequently from the withholding tax. Documents submitted disclosed that American Wire & Cable Co., Inc. will implement continuous reduction of its manpower due to redundancy effective July 30, 2000, affecting more or less twenty (20) employees due to the following reasons: 1. The services of the affected employees are in excess of what is reasonably demanded by the actual requirements of the Company; 2. High cost of imported raw materials principally due to peso devaluation and significant price increase of Copper and Aluminum products. This has contributed to the increase in the production costs by more than 55%; 3. Despite the increase in costs of production, the Company cannot increase its selling price due to stiff competition and dormant construction industry. Effectively, our gross income for the months ended 30 April 2000 had dropped by about 50%; 4. The production cost and operating expenses had increased in an alarming proportion affecting greatly your financial resources; .5. The company is continuously experiencing business reverses, and if the company will not implement this cost reduction program, this may result to the non-viability of your business operation; DHITCc and that the following is the list of separated employees: Name Position Alina, Fabian C. Machine Operator Aman, Nestor R. Utility Tender Aquino, Ruel B. Machine Operator Beroin, Bienvenido Jr. Z. Fork-Lift Operator Calderon, Dane V. Machine Operator Dane, Manuel H. Machine Operator Discaya, Jose Dante E. Machine Operator Domasin, Reynato D. Industrial Electrician Formoso, Rodolfo Jr. D. Technician Gaspar, Arnold G. Machine Operator Ibale, Jaime B. Fork-Lift Operator Terry, Gerardo G. Machine Operator Calmerin, Ronaldo C. Electrical Tester Dela Rosa, Ma. Louisa M. Payroll Assistant Guarin, Jerry B. Benefits Assistant Lauereta, Eliza M. Secretary Rapirap, Flordeliza B. Telephone Operator Somosot, Renato A. Production Supervisor Tabaco, Liborio Jr. A. Q.A. Supervisor In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 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 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 separation of American Wire & Cable Co., Inc.'s employees is due to redundancy, 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 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. The payment of the employees' 13th month pay and other benefits, in excess of the P30,000.00 threshold, plus their salaries, is subject, however, to income tax and consequently to the withholding tax. (BIR Ruling No. SB-69-98 dated October 6, 1998) 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group