BIR Ruling [DA-505-06]

August 18, 2006 BIR RULING [DA-505-06] 32 (B) (6) (b); DA-485-2003 dtd 12/10/03 Ubano Ancheta Sianghio & Lozada Law Offices 5th Flr. COCOFED Bldg. 144 Amorsolo St. Legaspi Village, Makati City Attention: Maria Teresa S. Sianghio-Ubano Counsel Gentlemen : This refers to your letter dated September 21, 2005, in behalf of your client PARAGON TRAVEL LIMITED-ROHQ, requesting confirmation of your opinion that the separation benefits and the cash equivalent of vacation leave credits to be paid by Paragon-ROHQ to its employees are exempt from income tax and consequently from withholding tax pursuant to Section 32 (B)(6)(b) of the National Internal Revenue Code of 1997. It is represented that PARAGON TRAVEL LIMITED-ROHQ (Paragon-ROHQ for short) is the regional operating headquarters of Paragon Travel Limited, a multinational company organized and existing under the laws of Hongkong; that Paragon-ROHQ has its business address at the 4th Flr., DPC Place, 2322 Chino Roces Avenue, (Pasong Tamo Ext.) Makati City; that in January 2005, Cendant Travel Services Group, Inc. (Cendant for short), a corporation duly organized and existing under the laws of the state of Delaware, the United States of America, acquired Paragon Travel Limited; that in addition, over the past 2 years Cendant has acquired several other entities in Australia, the U.S.A. and Europe as part of its travel distribution services group; that as a result of such acquisitions, Cendant is undergoing an extensive operational reorganization and restructuring in order to effectively and efficiently maximize its expanded global operations vis--vis its subsidiary and affiliated companies all over the world; that Paragon Travel Limited is greatly affected by the said reorganization because its operations will be integrated into other Cendant entities; that the integration of Paragon Travel Limited into the Cendant business will result to redundancy of work, which would affect the entire workforce of Paragon ROHQ; that considering that it would no longer be commercially viable and financially sound to continue the customer service and contact center in the Philippines, Paragon Travel Limited is left without choice but to close Paragon ROHQ effective 31 December 2005; that as a consequence of the closure, the employees of Paragon ROHQ will be terminated in three (3) batches; i.e., September 2005, December 2005 and March 2006; that Paragon-ROHQ is willing to pay separation pay over and above the separation pay required under the Labor Code of the Philippines, as amended; that for the sole purpose of the orderly settlement and winding up of corporate affairs of Paragon ROHQ, the third batch of employees will stay with Paragon-ROHQ until March 2006 (which is three months after its formal closure). Paragon-ROHQ will pay the separation package of the third batch of employees on 31 March 2006; and that, however, should winding up operations extend beyond March 2006, Paragon-ROHQ is willing to engage the services of those employees on a "consultancy or contractual" basis. aIHCSA 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 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 nor initiated by him. The above-mentioned provision requires the presence of two (2) conditions in order that the 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. As noted, because of various acquisitions undertaken by Cendant including that of Paragon-ROHQ, Cendant had decided to undertake extensive operational and reorganization and restructuring in order to effectively and efficiently maximize its expanded global operations vis--vis its subsidiary and affiliated companies all over the world. As a consequence of such integration of various service groups, the function of Paragon has become redundant with the gradual closure of Paragon-ROHQ, and the employees were determined to have been effectively separated due to redundancy. Accordingly, where the employees are separated involuntarily from the service due to redundancy, the same being beyond their control, the separation benefits and the cash equivalent of vacation leave credits that will be received by the employees from Paragon-ROHQ upon their separation from employment due to redundancy are exempt from income tax and consequently from 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 null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service