BIR Ruling [DA-427-99]

July 27, 1999 BIR RULING [DA-427-99] Sycip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas, Makati City Attention: Atty. Dante T. Pamintuan and Atty. Ernesto S. Taio, Jr . Gentlemen : This refers to your letter dated April 29, 1999, requesting, on behalf of your client Warner Lambert Philippines, Inc., (Warner) for a ruling that the separation benefits to be paid to the separated employees are exempt from income tax and consequently from the withholding tax. It is represented that Warner is a domestic company engaged in the manufacturing, marketing and sale of pharmaceutical and confectionery products; that it is one of the few major multinational pharmaceutical and confectionery companies in the country that still maintains its own manufacturing facility; that the Asian crisis created or contributed to the adverse effects of contracting markets, pricing constraints, cost escalation, globalization, increased regulatory requirements, and keen and aggressive competition; that in order to survive, every business concern is now faced with the dilemma of doing business as efficiently as possible; that Warner tried numerous formulae in the past several years to keep its Philippine operations intact, but to no avail; that in order to survive in the long term, Warner is compelled to now seek the most competitive sources of products for sale and, unfortunately, its aging plants in the Philippines can no longer operate as cost efficiently as other sources; that it should be pointed out that at least 10 other Warner plants worldwide have closed or have been scheduled for closure; that the Philippines is by no means an isolated case; that by end of October, 1999, Warner is targeting to close down its Philippine plants and continue henceforth as a sales and marketing firm; that the closure of the plants will have the effect of involuntarily terminating about 147 employees on the ground of closure or cessation of part of the business; that to cushion the effect of the closure on the employees who will lose their jobs, Warner is providing a Separation Package that will grant separation pay and other separation assistance as follows: 1. Separation Pay a) 2.5 months basic pay for every year of service, which is already inclusive of retirement benefits; TIHDAa b) additional 0.5 months basic pay for every year of service, if the employee shall dutifully complete his assigned tasks as specified in his/her key result areas, until the official close of manufacturing business operations (note: this is not intended to be compensation as the employee concerned will be paid his regular salary during this transition period; rather this is intended to be another component of separation pay whose release will be conditioned upon the employee's continued assistance in ensuring a smooth transition); c) additional separation pay equivalent to one (1) month salary; d) "C.A.R.E. Pabaon" of Pesos 25,000 intended to fund initial post-employment and/or retirement options. This additional assistance is granted under the company's program called "Career Alternatives, Retirement and Entrepreneurship {CARE} Program; and e) commutation of unused vacation and sick leave credits based on existing company policy. HIEASa 2. Other Separation Assistance a) Pro-rated 13th and 15th month bonuses; b) Full mid-year (14th month) bonus; and c) Three months extension of medical benefits. 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 the employees of your client is beyond their control, any and all amounts to be received by the employees who will be terminated, as a consequence thereof, are exempt from income tax and consequently from the withholding tax prescribed under Section 79, Chapter XIII, Title II of the Tax Code of 1997. (BIR Ruling No. DA-64-98 dated February 24, 1998) CDaSAE Moreover, the terminal leave pay, i.e. the accumulated vacation and sick leave credits which is part of the tax exempt separation pay is also exempt from 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 the payment of the salary of employees, if any, including the amount of bonuses exceeding P30,000.00 is subject to income tax and consequently to the withholding tax. 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)