BIR Ruling [DA-497-99]

September 3, 1999 BIR RULING [DA-497-99] Ponce Enrile Reyes & Manalastas Law Offices 3rd Floor, Vernida IV Building Alfaro Street, Salcedo Village Makati City Attention: Attys . Regulus C . Cabote Edwin B . Gastanes and Rhoda Regina Reyes-Rara Gentlemen : This refers to your letter dated July 21, 1999 requesting for a ruling as to whether or not the Special Retirement Program of your client, the Chase Manhattan Bank, Philippine Branch (Bank) partakes of an involuntary separation. It is represented that the Bank is a corporation duly organized under and by virtue of the laws of the United States of America and maintains a branch office in Makati City; that in an effort to make its organizational structure more sufficient and effective, the Bank undertook a Business Effectiveness Program which include enhancing shared services, aligning resources to strategic priorities and upgrading people and systems; that these programs resulted in a manpower complement in the Bank that is not consistent with the reorganization of its manpower structure and realignment and upgrading of its manpower complement; that to effect the necessary changes in manpower structure, the Bank decided to adopt and implement a Special Retirement Program which has the following features; (1) the Program is intended to cover employees in Operations and Financial Management Group with at least seven (7) years of service in the Bank as of August 31, 1999; (2) the Program is a non-recurring and non-precedent setting program which has a specific time limit from June 7, 1999 to June 30, 1999; (3) the Program does not amend nor modify the Bank's regular Retirement Plan, although the benefits payable under the Program shall include whatever benefits one might be entitled to under the Retirement Plan; (4) the special separation package being provided by the Program is fifteen (15) months gratuity pay plus two and a half (21/2) months salary for every year of service pro-rata. In addition, all other regular payments will be paid. These include salaries up to the last working day, and the cash equivalent of unused sick leave credits and holiday pay entitlements, if any; (5) the applicable special separation payments will first be applied to any outstanding housing, lot, house and lot, house repair, car and personal loan/s and other unsettled accountabilities with the Bank; (6) the choice of employees to be separated and their effective separation dates will be at the exclusive option and discretion of the Bank. The latest separation date will be September 30, 1999; and (7) that employees will be informed of their separation date on or before August 31, 1999. Individual separation notices will be given to employees concerned within thirty (30) days prior to their actual separation date. 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 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. 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 Special Retirement Program of the Chase Manhattan Bank, Philippine Branch partakes of the nature of an involuntary separation which is beyond the control of the affected employees, any and all amounts received by them as a result thereof, are exempt from all taxes and consequently from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. The payment of their salaries, however, is subject 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)