BIR Ruling [DA-424-06]

July 11, 2006 BIR RULING [DA-424-06] 32 (B) (6) (b); DA-100-2000 Lead for Health Suite 1101 Ma. Natividad Bldg. 470 T.M. Kalaw Avenue cor. Cortoda Street 1000 Ermita, Manila Attention: Ms . Joyce F. Pilapil Human Resources Manager Gentlemen : This refers to your letter dated June 22, 2006 requesting for a ruling on the following, viz : a. Whether or not the final pay and benefits (e.g. 13th month pay, VL credits and separation pay received by those employees separated involuntarily from the service are taxable. b. Does the provision of NIRC 32(B) to wit: "Any amount received by an official or employee as a consequence of separation of such official or employee from the service of the employer . . . for any cause beyond the control of said official or employee." support the tax exemption of your involuntarily separated staff? c. For those employees who would be completing their employment contract up to September 30, 2006, how will their benefits and final pay be taxed according to BIR Rules and Regulations? It is represented that your Project named Local Enhancement Development for health implemented though Management Science for Health and funded by the United States Agency for International Development (USAID) has an initial contract for 3 years, October 1, 2003 to September 30, 2006; that USAID decided not to extend the LEAD for Health contract beyond September 30, 2006; that this decision and due to lack of funds, your management decided to pre-terminate the employment contract of some staff whose job functions are no longer necessary for the remaining priority activities of the Project before September 30, 2006; and that all involuntarily separated staff however are entitled to receive some benefits as part of their final pay like 13th month pay, monetization of vacation leave credits and separation pay. IDTcHa In reply, please be informed that Section 32(B)(6)(b) of the 1997 Tax Code 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 due to 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 or service. The phrase "for any cause beyond the control of the said official or employee" in effect connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be of his own making, (Sec. 4(f), Revenue Regulations No. 1-68; Sec. 2(b)(2), Rev. Regs No. 6-82, as amended) 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 the staff is due to the pre-termination of the employment contract as a consequence of lack of funds, and therefore beyond the control of the affected employees, any and all amounts to be received by them as a result thereof, are exempt from all taxes and consequently from the withholding tax pursuant to Section 79, Chapter XIII, Title II of the Tax Code as implemented by Revenue Regulations No. 2-98, as amended. The payment of their salaries, however, is subject to income tax and consequently to the withholding tax. (BIR Ruling No. 100-2000 dated February 15, 2000) However, for those employees who would be completing their employment contract up to September 30, 2006, their benefits and final pay cannot be considered as benefits paid as a consequence of involuntary separation from the service of the employer, thus not within the contemplation of Section 32(B)(6)(b) of the 1997 Tax Code. Hence, said benefits and final pay are subject to income tax and consequently, to the withholding tax on wages pursuant to Section 79, Chapter XIII, Title II of the Tax Code as implemented by Revenue Regulations No. 2-98, as amended. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service