BIR Ruling [DA-443-98]

October 1, 1998 BIR RULING [DA-443-98] Caltex (Philippines), Inc. 6th Floor 6750 Ayala Avenue Makati City Attention: Ms . Joselia J . Poblador General Manager Legal & Tax Gentlemen : This refers to your letter dated August 20, 1998 requesting for a ruling that the separation benefits that your displaced employees will receive in your proposed redundancy early retirement settlement program as a result of the implementation of your new organizational structure, are exempt from income tax and consequently from the creditable withholding tax. cdta It is represented that you are a domestic corporation duly registered with the Securities and Exchange Commission; that your last redundancy program, which was implemented in 1996, was the subject of a ruling by this Bureau dated October 15, 1996; that since then, there have been new and substantial developments that have again compelled the company to undertake another program; that business conditions across Asia and in the Philippines have led the company to adopt a number of strategies to achieve a superior cost/productivity leadership position; that in the current deregulated environment with increasing competition, this attribute is essential for you to compete successfully; that at the Batangas refinery, the Company has initiated/conducted an intensive Culture Change Program over the past four (4) years to improve significantly its competitive position; that these initiatives have improved the performance of the refinery and consequently have enabled the refinery to safely run with fewer employees; that to provide the resultant reduction in employee numbers, a refinery separation package has been developed to help achieve the transition to the new refinery organizational structure; that the employees required to discontinue their employment at the refinery to allow for the implementation of the new organizational structure will receive a separation package; and that the separation program will be implemented in stages, starting with Refinery employees, and to cover the entire Company by year-end 1999. 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 due to death, sickness, or other physical disability or for any cause beyond the control of said official or employee is exempt from income tax regardless of age or length of service. The above-mentioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions, to wit: (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 your employees will be due to the implementation of your new organizational structure, which is beyond their control, any and all amounts received by them as a result thereof shall be exempt from all taxes and consequently from the withholding tax prescribed under 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 promulgated on Oct. 17, 1991.) It is, however, understood that this exemption does not include the payment of your employees' salaries, which are therefore subject to the withholding tax on compensation income. 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 from that as represented, then this ruling shall be considered null and void. (BIR Ruling No. 437-93 dated November 12, 1993) cdi Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)