BIR Ruling [DA-407-00]

November 27, 2000 BIR RULING [DA-407-00] 32 (B) (6) (b) SB-69-98 Tan & Venturanza Law Offices 2704 East Tower Philippine Stock Exchange Center Exchange Road, Ortigas Center Pasig City, Metro Manila Attention: Atty . Hilda P . Bautista and Atty . Enrico G . Valdez Gentlemen : This refers to your letter dated March 7, 2000 requesting for a ruling that the separation benefits to be paid to the employees of Belle Corporation (Belle) by reason of redundancy are exempt from income tax and consequently from the withholding tax. It is represented that Belle is a domestic corporation duly registered with the Securities and Exchange Commission under SEC Registration No. 52412 and engaged principally in real estate development and gaming; that due to lingering economic crisis and the substantial losses suffered by Belle in 1999, the company was constrained to streamline its operations by consolidating certain departments in the company to prevent further recurrence of unnecessary overhead expenses; that as a result, certain job positions in the company become redundant; that to address the above situation, Belle developed a Redundancy Program providing for benefits to a number of employees who occupy redundant positions in the company. 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 plays benefits to the official or employee or his heirs as a consequence of such separation. aIAHcE Since the separation of the 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