BIR Ruling [DA-498-99]

September 3, 1999 BIR RULING [DA-498-99] Siguion Reyna, Montecillo & Ongsiako Philcom Building 8755 Paseo de Roxas Makati City Attention: Attys . Antonio C . Pido and Ferdinand M . Hidalgo Gentlemen : This refers to you letter dated July 12, 1999 requesting on behalf of your client, DOLE Philippines, Inc., for a ruling as to the taxability of the special separation package including the normal retirement benefits that its employees will receive as a result of their separation due to redundancy. cdll It is represented that DOLE Philippines, Inc. is a domestic corporation engaged in the agro-industrial business in the Philippines; that early this year, upon the review of its business operation it was established that it has more than enough employees necessary for its operation; that consequently, it has decided to reduce its manpower to make its business more focused, cost effective and responsive to the changing market; that in the reduction of its manpower, the company has decided to separate first its retireable employees who are not less than fifty (50) years old and have been in the employ of the company for at least ten (10) years; that subsequent terminations will include employees who may not fall under this first group; and that for the first group of employees (retireable), the company will extend a special separation package that will include the normal retirement benefits of the employees under the BIR approved DOLE Philippines, Inc. Multi-Division Employees' Retirement Plan plus an ex-gratia send away gift equivalent to the following: Hourly Employees Monthly Salaried Employees P40,000.00 P60,000.00 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) condition 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 will achieve a manpower complement of a size compatible with your client's 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. Moreover, 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 Special Separation Package of DOLE Philippines, Inc. it is not to be equated nor pegged down by the benefits under its Retirement Plan, since the former 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 income tax and consequently to withholding tax. cdll Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)