BIR Ruling [DA-476-99]

August 17, 1999 BIR RULING [DA-476-99] Jimenez & Associates Suite 9002 Aurora Tower Araneta Center Quezon City Attention: Atty . Ramon T . Jimenez External Counsel Gentlemen : This refers to your letter dated July 14, 1999 requesting on behalf of your client, International Center for Living Aquatic Resources Management (ICLARM), for a ruling as to the taxability of the separation pay package that its employees will receive as a result of their separation due to redundancy. It is represented that for twenty-two (22) years, the headquarters of ICLARM was located in rented office accommodations at Makati City while at the same time, it managed and operated research sites in Solomon Islands, Bangladesh, Malawi, Egypt and the Caribbean; that recent developments, however, with its expanded global role, it has underscored the need for ICLARM to have laboratory and research facilities on site; that the Board of Trustees of ICLARM, after reviewing all considerations of the impact on costs, staff and operations including communications and transport links to the site, the facilities available on the site, site set-up, transition costs and long-term operation costs, decided to accept the offer of the Government of Malaysia to locate its global headquarters in Penang, Malaysia; that as it moves its global headquarters to Malaysia, ICLARM will continue its specific projects and activities under the Philippine country program and to develop new research and training activities in partnership with its many Philippine collaborators, possibly with the fisheries related bureaus of the Department of Agriculture as partners, to benefit the Philippines in aquatic resources management as the government begins implementation of the new Fisheries Code and the Agricultural and Fisheries Modernization Act; that the foregoing actions will be implemented before the year-end; that ICLARM has announced to its employees the relocation of ICLARM's headquarters to Penang, Malaysia and the re-structuring of the Philippine program; that this twin moves will entail (1) Selection of some nationally-recruited staff (NRS) to move to Malaysia as Regionally-Recruited Staff (RRS); (2) Retention of a number of NRS staff for on-going projects contracts, continue to support the work on newly funded projects that will ensure long-term continuity in the Philippines, and to operate the office which will be retained in the Philippines; that at present, NRS staff will be selected to move to Malaysia; that they will continue employment with ICLARM but under modified contracts of employment according to their functions in a redesigned and restructured central operation in a headquarter's set-up; that, however, around 40 NRS will be retained in the ICLARM's Philippine Office to continue employment; that NRS who will not be retained for Philippine operations will be laid off in a Separation Program to be announced to affected employees; that their separation from employment will be effective by the end of business hours on November 30, 1999; that ICLARM will be paying a separation benefit package reckoned as follows: Table 1: Socialized Factors Factor Salary Bracket (PHP) 1.35 0 To 15,000 1.25 15,001 To 25,000 1.15 25,001 To 35,000 1.10 35,001 To 45,000 0.90 Over 45,000 Table 2: Loss of Opportunity Factor Age Bracket (Years) 0.0 Up To 30 1.0 Over 31 SP (YS*CBS*SF) + LO 15,000 SP Separation Pay YS Years of Service CBS Current Basic Salary SF Socialized Factors (Table 1) LO Loss of Opportunity (Table 2) and that all separated staff will get their accumulated provident fund and the cash equivalent of their unused vacation leave to form the entire separation package due to involuntary separation. 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 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. (see Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. October 17, 1991) Furthermore, the retirement benefits to be received by the separated employees from their Provident Fund are likewise exempt from withholding tax under Section 32(B)(7)(a) of the Tax Code of 1997. cdlex However, the payment of their salaries, is subject to withholding tax. (BIR Ruling No. 035-93 dated January 15, 1993) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)