BIR Ruling [DA-461-05]

November 14, 2005 BIR RULING [DA-461-05] DA-168-02; SB-69-98 Sec. 32 (B) (6) (b); Sec. 2-78 (B) (1) (b) RR 2-98 Art. 283, Labor Code Manila Peninsula Hotel, Incorporated Makati City Attention: Monina S. Lasalla Director of Human Resources Gentlemen : This refers to your letter dated August 30, 2005 requesting for confirmation from this Office concerning tax exemption of the retirement benefits of your employees. It is represented that on August 31, 2005, Manila Peninsula Hotel (" Peninsula " for brevity) declared the positions of ten (10) of its employees redundant in accordance with Article 283 of the Labor Code.The affected employees, namely, David E. T. Lim , Jean D. Singson , Ma. Belina B. Mariano, Corazon O. Castaneda, Lorenzo M. Lim, Ruby A. Palicoc, Nanette N. Lazo, Ernesto K. Macatangga, Joseph V. Balacanao and Mellany R. Naval received various amounts corresponding to their respective retirement benefits under the Manila Peninsula Hotel Inc. Employees' Non-Contributory Retirement Plan (MPHIENCRP). It is now your position that the above benefits are not subject to income tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. In reply, please be informed that in BIR Ruling DA-168-02, this Office has already held 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 . Under Sec. 2-78(B)(1)(b) of Revenue Regulations No. 2-98 implementing Sec. 32 of the Tax Code, 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. cTAaDC The above ruling finds application in this particular situation as the affected employees were terminated by reason of redundancy, an involuntary cause provided for under Article 283 of the Labor Code.As redundancy is essentially attributed to the employer and not the employee's actions, it places this case squarely within the purview of the phrase "for any cause beyond the control of said official or employee" in Sec. 2-78(B)(1)(b) of Revenue Regulations No. 2-98. Accordingly, this Office confirms your opinion that Peninsula's award of benefits to its employees under the MPHIENCRP is not subject to income tax as well as withholding tax based on the above provisions of law. The payment of the separated employees' 13th month pay and other benefits, in excess of the P30,000.00 threshold, plus their salaries, is subject, however, 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service