BIR Ruling [DA-452-98]

October 7, 1998 BIR RULING [DA-452-98] Joaquin Cunanan & Company 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . George Lavadia Gentlemen : This refers to your letter dated January 5, 1998 requesting on behalf of your client, Kodak Philippines, Ltd. (KPL), for confirmation of your opinion that the vested benefits from a retirement plan to be paid to its employees under a separation program are not taxable to the employees and consequently not subject to the withholding tax on separation. It is represented that your client, to maintain its competitiveness, adopted a re-organization plan to streamline its operations, right-size its workforce, and optimize its overall efficiency and productivity; that in implementing the reorganization plan, certain positions will be eliminated for redundancy; that in order to compensate employees who will become redundant as a result of the reorganization, the company intends to pay such employees a separation pay equivalent to one (1) month salary for every credited year of service; that in addition to the separation pay, redundant employees who have vested rights (retirement benefits) and have rendered at least ten (10) years of service will also receive retirement pay under the company's trusteed retirement plan registered with the Bureau of Internal Revenue and that redundant employees who have rendered less than six (6) years will also receive at least six (6) months salary from the retirement plan. 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 the said official or employee, shall not be included in gross income and shall be exempt from taxation regardless of age or length of service. The above mentioned law requires the presence of two 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 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 proposed separation of redundant personnel will achieve a manpower complement of a size compatible with your redefined business strategies and management objectives, it is therefore beyond the concerned employees' control. Thus, any and all amounts received by them as a result thereof are exempt from income tax and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. Such tax exemption is understood not to include the company's payment of salaries of the retrenched/separated employees. This ruling is 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 from the date of issuance. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)