BIR Ruling [DA-500-99]

September 3, 1999 BIR RULING [DA-500-99] Guingona & Sedigo Suite 309, ITC Building 337 Sen. Gil Puyat Avenue Makati City Attention: Atty . Epifanio Sedigo , Jr . Gentlemen : This refers to your letter dated August 4, 1999 requesting on behalf of your client, Jardine Schindler Elevator Corporation, for a ruling as to the taxability of the separation pay that its employees will receive as a result of their separation due to redundancy. It is represented that Jardine Schindler Elevator Corporation is engaged in the business of selling, installing and maintaining elevators and escalators; that since 1992, it has been experiencing heavy losses; and that to minimize if not prevent further losses, the company reorganized itself, which resulted in making the positions of twenty-two (22) of its employees to become redundant; thus, causing their separation from service. 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. LibLex 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) Finally, the payment of their salaries, is subject to withholding tax. (BIR Ruling No. 035-93 dated January 15, 1993) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)