BIR Ruling [DA-460-05]

November 11, 2005 BIR RULING [DA-460-05] Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty. Priscilla B. Valer and Atty. Jayson L. Fernandez Gentlemen : This refers to your letter dated September 29, 2005 stating that in December of 2004, IBM USA and Lenovo Group Limited (Lenovo),a Chinese corporation, announced a definitive agreement under which Lenovo will acquire IBM's worldwide Personal Computing (PC) Division to form the world's third-largest PC business; that IBM employed six (6) employees in its PC Division, including Ms. Rosa Ana Sison (Ms. Sison);that as a consequence of this transaction, Ms. Sison decided not to transfer to the Philippine Representative Office of Lenovo and was therefore terminated by IBM Philippines on the ground of redundancy effective on September 1, 2005; and that as a result of the termination, IBM Philippines will pay Ms Sison a special separation package consisting of: 1. Separation pay equivalent to one (1) month salary for every year of service. The separation pay will be funded by the retirement plan to the extent of vested benefits and by IBM Philippines; 2. Prorated Christmas Bonus; 3. Unused Vacation leaves. Based on the foregoing, you now request confirmation of the following: "1. The separation benefits granted to Ms. Sison are exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997; and "2. The expenses incurred by IBM Philippines in providing the separation benefits are deductible from gross income for being an ordinary and necessary trade or business expense pursuant to Section 34(A)(1)(a)(i) of the Tax Code of 1997." In reply thereto, 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 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. Since the separation of Ms. Sison is beyond her control, having been a direct consequence of the sale of IBM's worldwide PC Division to Lenovo, any and all amounts to be received by her 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. Moreover, the commutation and payment of unused vacation leave credits are likewise not subject to income tax and consequently to withholding tax. ( Commissioner of Internal Revenue vs. Court of Appeals & Efren P. Castaeda, 203 SCRA 72, 1991 ) IDAEHT However, the payment of the pro-rated Christmas Bonus in excess of the P30,000.00 threshold amount is subject to income tax and consequently to the withholding tax. ( BIR Ruling No. SB069-98 dated October 6, 1998) Finally, the expenses incurred by IBM Philippines in providing the said benefits are deductible from gross income for being an ordinary and necessary trade or business expense pursuant to Section 34(A)(1)(a)(i) of the Tax Code of 1997. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service