BIR Ruling [DA-503-06]

August 16, 2006 BIR RULING [DA-503-06] 32 (B) (6) (b); RR 2-98; DA-016-2000 J. Keith P. Nieto Law Offices Princeville Executive Townhomes S. Laurel Street, Mandaluyong City Attention: Atty. J. Keith P. Nieto Partner Gentlemen : This refers to your letter dated July 27, 2006 requesting on behalf of your clients, employees of Petrochemical Corporation of Asia Pacific ("PETROCORP"), for a ruling that the separation and terminal benefits to be received by the employees of PETROCORP as a result of their separation due to serious operational/financial reverses suffered by PETROCORP is exempt from all taxes and consequently, from the withholding tax. BACKGROUND Petrochemical Corporation of Asia Pacific (the "PETROCORP") was established in 1991 to manufacture polypropylene resins, the main ingredient in the production of plastic products and was intended to commence operation in 1994, with production to start in 1995. Its polypropylene plant was constructed at the Petrochem Park in Mariveles, Bataan. The construction of the plant was delayed due to several factors like site selection delay and lack of effective government policy. The Plant finally commenced operations in May 1998. Since the start of operations, the plant had not operated at full capacity due mainly to insufficient working capital, lack of feedstock material, power trippings and mechanical failure. The market was also affected by the importation and smuggling of like products. The plant experienced its first shutdown in April 2000, due to unfavorable market conditions and inadequate working capital. PETROCORP was able to resume operations when it entered into a tolling agreement with its dealers. Although this manner of business was not optimal for PETROCORP, it was enough to keep the plant operational and to pay the employees their salaries. However, during lean months, tollers shied away from PETROCORP due to the high prices of raw materials. Although the business climate of PETROCORP looked very bleak, its management fought to keep the Bataan plant operable. However, due to uncontrollable circumstances, management and the board of directors could not revive and recommence operation, prompting PETROCORP to inform its employees of the continued non-operation of the plant. Unable to infuse the needed capital, PETROCORP finally notified its employees of the permanent closure of the plant. On May 11, 2005, PETROCORP officially ceased its operations due to serious business losses. PETROCORP at the time of its cessation of operations was not able to pay any of its employees separation / terminal benefits. During the early part of this year, an investor-group signified its intention to takeover PETROCORP, and eventually revives the operations of PETROCORP. However, part of its requirements is the total severance /termination of the services of PETROCORP's previous employees with payment of all separation/terminal benefits. In reply, please be informed that pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as amended, and implemented by Revenue Regulations (RR) No. 2-98, as last amended by RR No. 30-2003, 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. aIcSED 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 PETROCORP 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 amended, and implemented by RR No. 2-98, as amended. 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) However, the payment of the employees' salaries is subject to income tax and consequently to withholding tax. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service