BIR Ruling [DA-504-98]

November 18, 1998 BIR RULING [DA-504-98] Ponce Enrile Reyes & Manalastas Law Offices 3rd Flr. Vernida IV Bldg. Alfaro St., Salcedo Village 1227 City of Makati Attention: Atty . Regulus E . Cabote and Atty . Edwin B . Gastanes Gentlemen : This refers to your letter dated June 26, 1998 requesting for and in behalf of your client, Rizal Commercial Banking Corporation (RCBC) for a ruling whether RCBC's Special Retirement Program partakes of an involuntary separation such that amounts received by the separated employees as a consequence thereof are exempt from the payment of income tax pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. casia It is represented that in view of the stiff competition in the banking industry, RCBC has embarked on Process Re-engineering which calls for a review and streamlining of its operational processes and an extensive upgrading of its computer and automated systems; that this has led, and will lead, to an excess of personnel of a considerable number; that under the Bank's Process Re-engineering, all accounting functions performed in all of the Bank's branches shall be centralized in a Regional Operations Center, thus, all employees performing accounting functions shall be affected; that with the introduction of the new automated systems, the Regional Operations Center shall only require 136 employees, hence, for accounting functions alone, there will be an excess of around 300 personnel; that in addition, RCBC has re-structured the Bank's organizational framework resulting in redundancy of numerous positions; that the reduction of excess workforce is therefore necessary; and that the 1998 Special Retirement Program (SRP) shall have the following features: "1) The Program is extended to all regular employees; "2) The Program is one time, non-recurring and non-precedent setting program; "3) The Bank has the exclusive right and absolute discretion and judgment to select employees affected by the Process Re-engineering . (Emphasis supplied) "4) The definitive period within which the Program is offered and made available is from 01 July 1998 to 31 July 1998; "5) The employee selected by the Bank will receive the following separation package: (i) Separation pay equivalent to one (1) month latest basic salary per year of service, a fraction of at least six (6) months being considered as one whole year; (ii) Gratuity pay equivalent to one (1) month latest basic salary per year of service; (iii) Full commutation and payment of unused vacation leave credits; (iv) Full payment of the proportionate 13th month pay and mid-year bonus; (v) Payment of salaries up to last working day. "6) The benefits under the Program are intended to be tax exempt including the cash equivalent of the leave credits in consonance with Section 32(B)(6)(a) and (b) of the National Internal Revenue Code of 1997; "7) Outstanding loans and obligations of the employees to the Bank will be deducted from the separation/gratuity payments; "8) The benefits payable under the Program already include whatever benefits one might be entitled to under the existing retirement plans." 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 . 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 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 RCBC 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. Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to the withholding tax. (see Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. October 17, 1991) It is however, understood that this exemption does not include the payment of the separated employees' salaries. (BIR Ruling No. 035-93 dated January 15, 1993) LLcd 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, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)