BIR Ruling [DA-453-98]

October 7, 1998 BIR RULING [DA-453-98] Siguion Reyna Montecillo & Ongsiako 8755 Paseo de Roxas, Philcom Building Makati City Attention: Attys . Luisito M . Lantin and Arturo D . Brion Gentlemen : This refers to your letter dated August 19, 1998 requesting on behalf of your client, Philippine Commercial and Industrial Bank (PCIB), for a ruling as to the taxability of the separation pay package that its affected employees will receive under a Special Separation program based on redundancy. cdta It is represented that the redundancy is brought about by the reduction of business transactions and the need to re-organize to respond to the current economic conditions; that in this reorganization, there will be a merger of job functions and changes in bank processes and procedures for purposes of achieving efficiency at the most economical and cost effective means; that PCIB expects to terminate as well under its Special Separation Program the services of employees suffering from illness or diseases allowed under Article 284 of the Labor Code; and that PCIB intends to give the affected employees the following benefits under the Special Separation Program : a. Gratuity Benefits gratuity benefits employees are entitled to under the Gratuity Plan plus a premium of one (1) month's pay for every year of service (where a fraction of 6 months or more is considered as one whole year) based on the employees' salary as of separation date; b. Provident Fund Benefits The employees' contribution and earnings plus one, hundred percent (100%) of the Bank's contributions and earnings regardless of years of service to the Bank; c. Other Benefits Other benefits like existing vacation and sick leave credits following existing policy and practice. 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 . (Emphasis supplied) 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 these two (2) conditions in order that the employee benefits may be granted tax exemptions : (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. Since the separation of the employees of your client is beyond their control, 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 gratuity benefits to be paid by PCIB to its affected employees plus a premium of one (1) month's pay for every year of service, based on the employees' salary as of separation date and the benefits under the Provident Fund consisting of the employee's personal contributions, the PCIB counterpart contributions and the income of the Fund to which the employee is entitled and is distributed to him 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. Furthermore, the other benefits i.e., the existing accumulated vacation and sick leave credits which are 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) aisadc Finally, the payment of their salaries is subject to withholding tax. (BIR Ruling No. 035-93 dated January 15, 1993) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)