BIR Ruling [DA-464-05]

November 18, 2005 BIR RULING [DA-464-05] SEC. 32 (B) (6) (b); DA-151-2001 dtd 9/05/01 PSi Technologies, Inc . FTI Special Economic Zone Electronics Avenue Taguig, Metro Manila Attention: Thelma G. Oribello SVP Chief, Finance Officer Gentlemen : This refers to your undated letter requesting a ruling on whether or not the separation benefits to be given to your employees as a result of their separation under the Early Retirement Program are exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It is represented that your company PSi Technologies Inc. is a corporation duly organized and existing under the laws of the Philippines; that it provides comprehensive package design, assembly and test services for power semiconductors used in computers, consumer electronics, automotive systems and industrial products; that it has been existing as a juridical entity since January 28, 1988 and employs around 3,000 workers; that currently, the company is experiencing a slowdown in its business since the beginning of the year brought about by the slump in the global semiconductor and electronics industry; that in order to cope with the situation, the company has installed necessary cost reduction measures to be able to maintain headcount such as scheduled vacation leaves, shortened weekdays, and even a temporary shutdown of some work areas; that, however, in spite of the above measures, the company continued to suffer from a lack of business opportunity and an excess manpower compliment and that in light of these circumstances, the company decided to embark on an "Early Retirement Program" with the following features: 1. The program covers all Direct Labor, Indirect Labor, Managers and Executive employees with five (5) to eighteen (18) years of service with the company. 2. Management shall have the sole prerogative to determine the employees, who will be separated, with the number of employees to be separated/retired not to exceed two hundred (200). TcAECH 3. The separation package provided consists of the following: a. Separation benefits per year of service is computed at 100% of the amount of basic salary at the time of separation. b. Money value of accumulated vacation and sick leaves computed based on amount of basic salary at the time of separation. 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 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 availment of the Early Retirement Plan is beyond the control of the employees, any and all amounts that they will receive as a result thereof is exempt from income tax and consequently, from withholding tax as prescribed by Section 70, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. Moreover, the terminal leave pay, i.e., the accumulated vacation and sick leave credits which is part of the tax-exempt separation pay is also exempt from tax. (BIR Ruling No. 98-91 dated June 4, 1991 citing Commissioner of Internal Revenue v. Court of Appeals and Efren P. Castaneda ,G.R. No. 96016 prom. October 17, 1991). DcSACE 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service