BIR Ruling [DA-435-99]

July 28, 1999 BIR RULING [DA-435-99] 32 (B) (6) (b) 035-93 Atty. Regulus E. Cabote 3rd Flr. Vernida IV Building Alfaro Street, Salcedo Village 1227 Makati City S i r : This refers to your letter dated July 9, 1999 requesting for and in behalf of your client, Philippine Phosphate Fertilizer Inc. for a ruling whether the separation of its employees under the Company's "1999 Right-Sizing Program" partakes of an involuntary separation such that amounts to be received by the separated employees as a consequence thereof are exempt from the payment of income tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It is represented that Philippine Phosphate Fertilizer Inc. is a corporation primarily engaged in the production of fertilizers for export principally to other Asian countries; that the Company was duly organized under and by virtue of Philippine laws and it maintains its principal office at the 10th Floor of the Pearly Bank Building, Valero Street, Makati City; that its plant is located at Leyte Industrial Development Estate in Isabel, Leyte; that the Company has been experiencing financial losses for the last several years which losses are primarily due to its several foreign-denominated loans which continually escalates due to the depreciating peso and the unfavorable market prices for the Company's products in the international market; that the Company's operating income is barely sufficient to sustain its operations; that in order to streamline operations and cut down on expenses, the Company has proposed a Right-Sizing Program for both its Principal and Plant offices whereby the number of the Company's employees shall be reduced and the function of these separated employees shall be integrated with those who will remain; that the Company's Right-Sizing Program is a non-recurring and non-precedent setting program; that the choice of employees to be separated and their effective separation dates will be at the exclusive discretion of the Company ; that each Division/Department Head shall submit to the Company's HRM Department a list of employees to be covered by the Right-Sizing Program; that the HRM Department shall compile these lists and submit the same to a Program Review Committee who will review, revise or endorse the recommendation of the Division/Department Heads; and that the Program Review Committee shall thereafter submit its final list to the Program Approving Committee who will finally decide on who shall be separated and the effective dates of separation. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, 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: (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 said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Accordingly, the separation of the employees of Philippine Phosphate Fertilizer Inc. under the Company's 1999 Right-Sizing Program partakes the nature of involuntary separation since the same is beyond their control and, therefore, any and all amounts that they will receive as a result thereof, is 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. Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to the withholding 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 this exemption does not include the payment of the separated employees' salaries. (BIR Ruling No. 035-93 dated January 15, 1993) TSDHCc 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)