BIR Ruling [DA-449-99]

August 4, 1999 BIR RULING [DA-449-99] Sanidad Abaya Cortez Te Viterbo Enriquez & Tan Law Firm 2nd Floor, Transorient Maritime Building 66 Timog Avenue, Quezon City Attention: Atty . Edgardo R . Abaya and Atty . Alexes M . Enriquez Gentlemen : This refers to your letter dated December 22, 1997 requesting for a confirmation of your opinion that the separation benefits to be received by the employees of your client, Philippine Appliance Corporation (Philacor), pursuant to a compulsory redundancy program are tax exempt. It is represented that Philacor is a duly registered domestic corporation engaged in the manufacture of refrigerators, freezers and washing machines; that in 1995, Philacor's Board of Directors approved a modernization program to respond to the new and heightened demands for a long term survival of its operations; that the program called for investments for a new plant site in Barrio Maunong, Calamba, Laguna, extensive product development and testing facilities, better personnel amenities and offices; that more significantly, plans were finalized to utilize state-of-the-art manufacturing equipment and facilities characterized by a high level of mechanization and automation that are designed to increase output, improve material utilization and productivity; that the combination of manufacturing and support capabilities requires reduced factory manpower, lesser factory supervision and support requirements; that by reason of these technological innovations, Philacor had to restructure its organizational set-up and implement a WORKFORCE REDUCTION PLAN based on the resulting redundancy of employees needed for the efficient and productive operations and that all employees affected by the redundancy program and whose work are found redundant shall be compulsorily terminated from work and shall receive a corresponding redundancy pay. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997 (formerly Section 28(b)(7)(B) of the Tax Code, as amended), 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. prcd Since the separation of the employees affected by Philacor's workforce reduction plan 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 affected employees' salaries, however, is subject 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)