BIR Ruling [DA-525-98]

November 25, 1998 BIR RULING [DA-525-98] Mr. Jose S. Fernandez, Jr. 418 Acacia Avenue Ayala Alabang Village Muntinlupa City S i r : This refers to your letter dated October 28, 1998 requesting for a ruling as to whether or not your terminal leave pay is subject to income tax and consequently, to withholding tax. It is represented that as a nominee of the National Development Corporation (NDC), which is a stockholder in Philippine Phosphate Fertilizer Corporation (PHILPHOS), you served as Director and President of PHILPHOS beginning 1993; that on June 11, 1998, NDC General Manager Mariano S. Salazar issued a Memorandum directing all NDC nominees in NDC subsidiaries or affiliates to submit their courtesy resignation to the NDC Chairman; that despite the fact that your term of office has not lapsed, in compliance with the aforesaid Memorandum, you submitted a courtesy resignation to then NDC Chairman and DTI Secretary Cesar B. Bautista on June 15, 1998; and that the said courtesy resignation effectively terminated your employment at PHILPHOS. 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 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. The basic issue to be resolved in this case is whether or not your termination which is a result of a Memorandum directing all NDC nominees in NDC subsidiaries or affiliates to submit their courtesy resignation to the NDC Chairman is embraced within the meaning of the phrase "for any cause beyond the control of the said official or employee" as to entitle them to tax exemption, as regards terminal leave pay and all amounts received in consequence of such separation. In a case concerning the tax treatment of terminal leave pay, the Supreme Court, in the case of Borromeo v. CSC, 199 SCRA 911, held that: ". . . commutation of leave credits, more commonly known as terminal leave pay , is applied for an officer or employee who retires, resigns or is separated from the service through no fault of his own. (Manual on Leave Administration Course for Effectiveness, published by the Civil Service Commission, pages 16-17). In the exercise of sound policy, the Government encourages unused leaves to be accumulated. The government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits ." (Emphasis supplied) Thus, following the above rationale, the Supreme Court categorically ruled in CIR vs. CA, 203 SCRA 72, that the terminal leave pay received by a government official or employee is not subject to withholding (income) tax) Reference may also be made through pertinent rules and guidelines of the Civil Service Commission (CSC). Pursuant to II.4.a.4 of Memorandum Circular No. 38, s. 1993 (Omnibus Guidelines on Appointments and Other Personnel Actions) of the CSC, viz: "II. COMMON REQUIREMENTS AND PROCEDURES FOR REGULAR APPOINTMENTS xxx xxx xxx "4. Employment Status "a. . . . "4) Co-terminous issued to a person whose entrance and continuity in the service is based on the trust and confidence of the appointing authority or that which is subject to his pleasure or co-existent with his tenure or limited by the duration of a project or subject to the availability of funds or issued for a position which is co-existent with the appointee or as provided for by law." In the Philippine Civil Service Employee Handbook as published by the CSC, the grounds by which government employees can be separated from service are therein outlined. On the subject of involuntary separation, it is stated, thus: "Involuntary Separation "You can also be forced to leave the civil service. The grounds for this include: xxx xxx xxx the expiration or termination of your appointment or service contract." Accordingly, your separation as Director and President of PHILPHOS in view of a Memorandum directing all NDC nominees in NDC subsidiaries or affiliates to submit their courtesy resignation to the NDC Chairman can be properly considered as involuntary separation and therefore falls within the purview of the phrase "for any cause beyond the control of said official or employee" under Section 32(B)(6)(b) of the Tax Code of 1997. Definitely, it cannot be said that the element of voluntariness is present in your case. Cessation of employment by operation of law or by expiration of one's term of office is always involuntary on the part of the employee concerned for it is consistent with the experience of man not to want losing that which gives him economic sustenance and livelihood. This is further bolstered by Section 2.78.1(B)(1)(b) of Revenue Regulations No. 2-98, implementing the provision of Section 32 of the Tax Code, where it said, thus: ". . . the phrase for any cause beyond the control of the 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 separation was not of his own making." In view hereof, this Office holds that the terminal leave pay and all amounts received by you on the occasion of your involuntary separation from the service are exempt from the income tax and consequently from the withholding tax. This tax exemption does not of course include the payment of your salary, if any, which is subject to income tax and consequently to the withholding tax. (BIR Ruling No. 143-98 dated September 30, 1998) aisadc 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)