BIR Ruling [DA-462-05]

November 14, 2005 BIR RULING [DA-462-05] DA-168-02; SB-69-98; Sec. 32 (B) (6) (b); Sec. 2-78 (B) (1) (b) RR 2-98; Art. 283, Labor Code Urdaneta Village Association, Inc . Urdaneta Avenue, Urdaneta Village Makati City Attention: Olivia L. Padilla President Gentlemen : This refers to your letter dated August 30, 2005 requesting for an opinion from this Office concerning tax exemption of the separation packages of the security guards in your employ. It is represented that due to increasing operational costs and losses as well as the expiration of its security license, Urdaneta Village Association, Inc . (" Urdaneta " for brevity) no longer found it feasible to maintain its internal company security force. As a result, Urdaneta commenced a retrenchment program that resulted in the termination from employment of twenty-eight (28) of its security personnel. The affected personnel are as follows: ABDULLAH, SALIC LANUZA, FERNANDO BAGUIO, EDUARDO MAHINAY, VIRGILIO BALITIAN, ZALDY MARCOS, FLORENCIO BARICAUA, PAULO MOHAGAN, AMADO BONCALON, WARREN NAVARRA, EVERARDO BUSTILLO, MICHAEL ODOY, WILMO CARTAS, ROGELIO PASQUITE, JERWIN DANIPOG, DANILO PETALVER, DERIE FETALVERO, PAQUITO PINGKIAN, BENITO FLAVIANO, RUDINO SAN PEDRO, JESUS FRANCISCO, RODOLFO SARANDI, DOMINADOR GUTIERREZ, RODRIGO SILVERO, GEREMIAS HINAUTAN, CARLITO VISITACION, JOEY JAPITANA, JOEL VISITACION, ROLANDO Urdaneta now requests that the above benefits be not subjected 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. EcAHDT The above ruling finds application in this particular situation as the affected employees were terminated by reason of retrenchment, an involuntary cause provided for under Article 283 of the Labor Code.As retrenchment 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 Urdaneta's award of separation benefits to its employees are 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