BIR Ruling [DA-487-99]

August 26, 1999 BIR RULING [DA-487-99] Philippine Communications Satellite Corporation Telecoms Plaza Building 316 Sen. Gil J. Puyat Avenue Makati City Attention: Atty . Luis K . Lokin, Jr . General Counsel Gentlemen : This refers to your letter dated July 7, 1999 requesting for a ruling as to whether or not the benefits to be received by your employees who would avail of the early retirement program of Philippine Communications Satellite Corporation (PCSC) are exempt from income tax and consequently from withholding tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It appears that PCSC conducted an extensive study of its operations in view of the continuing decline of profits it had experienced over the past several years and eventually, this year, it incurred operating losses in millions of pesos; that to cushion the effect of such loss and possible losses in the future, the study indicated the need to reorganize, which plan would necessarily result in the reduction of personnel as there are several positions in the entire organization that have become redundant; that to do about separating sixty-seven (67) affected employees, PCSC plans to implement an Early Retirement Program wherein employees who have rendered at least ten (10) years of service regardless of age and whose positions are determined redundant by the study will be forced to retire under the company's retirement plan; and that in addition, they shall be paid the amount as provided for under the Labor Code for separation due to redundancy. 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 your employees will achieve a manpower complement of a size compatible with your business strategies and management objectives, it is therefore beyond the concerned employees' control. Thus, 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. cdlex The separation pay is required in the cases enumerated in Articles 283 and 284 of the Labor Code of the Philippines which include retrenchment and redundancy. This provision is a statutory right designed to provide the terminated/separated employee with the wherewithal need during the period that he is looking for another employment. (Santos vs. NLRC, 154 SCRA 166, 172) Hence, as far as the early retirement program of PCSC is concerned, it is not to be equated nor pegged down by the benefits under its Retirement Plan, since the separation pay is meant to alleviate and help tide over the redundant/terminated employees until they find a new employment or means of livelihood. (BIR Ruling No. 105-96 dated October 15, 1996) Furthermore, 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) Finally, the payment of their salaries, is subject to withholding tax. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)