BIR Ruling [DA-532-99]

September 13, 1999 BIR RULING [DA-532-99] Ponce Enrile Reyes & Manalastas Law Offices 3rd Floor, Vernida IV Bldg., Alfaro Street Salcedo Village, Makati City Attention: Atty . Regulus E . Cabote and Atty . Edwin B . Castanes Gentlemen : This refers to your letter dated May 17, 1999, requesting on behalf of your client, Citibank, N.A. - Manila Branch (Company) for a ruling on whether the separation from the company of certain employees as a result of corporate reorganization partakes of an involuntary separation such that the separation benefits to be paid to the separated employees are exempt from income tax and consequently from the withholding tax. prcd It is represented that Citibank is a company incorporated under the laws of the United States and authorized to do business in the Philippines; that on account of the company's continuing efforts to make its organizational structure more efficient and effective, the Company has implemented a strategy of multi-country initiative, automation, de-layering and re-configuration; that this has resulted in a manpower complement in the company that is not attuned to present business and operational requirements, thereby requiring consolidation of functions, reorganization of its manpower structure, and the realignment and upgrading of manpower complement; that the reorganization resulted in several positions becoming inappropriate and/or personnel no longer needed; that to accomplish the separation of the affected employees, the company implemented the Special Separation Program in order to effect a separation in a manner that takes care of the welfare of those to be separated under the Program; that the main features of the Program are as follows: 1. The program is intended for all Officers and Staff of the Global Consumer Banking (GCB) with at least one (1) year of service as of 20 May 1999 who are affected by the reasons above stated; 2. This is a non-recurring and non-precedent setting program which has a specific time limit commencing on 20 May 1999 and to be terminated by 20 June 1999. 3. The Program does not amend nor modify the Company's regular Retirement Plan, although the benefits payable under the Program shall already include whatever benefits one might be entitled to under the Retirement Plan. 4. The special separation package or payments being provided under the Program are as follows: a) Separation Pay equivalent to 120% of Current Monthly Salary for every year of service, where a fraction of at least six (6) months shall be considered as one (1) whole year. For purposes of computing the separation pay, the Current Monthly Salary shall be equivalent to the annual salary rate divided by thirteen (13). llcd b) Gratuity Pay as follows: Years of Service Gratuity Pay 1-5 years 3 months' basic salary 6-10 years 5 months' basic salary 11 years and above 7 months' basic salary c) Retirement Benefits per Retirement Plan Rules; d) The applicable special separation payments will first be applied to the outstanding Staff Loans and other unsettled accountabilities with the Company. The remaining special separation payments will thereafter be applied to the outstanding Housing Loan; e) In addition, other regular payments will be paid as follows: salaries up to the last working day, overtime and other premium payments such as night differential pay and working on holiday premium pay; 5. The choice of employees to be separated and their effective separation dates will be at the exclusive discretion of the Company. The latest separation date will be 20 December 1999; 6. Individual separation notices will be given to employees concerned. and that as a result of the corporate reorganization of the Company, all its employees who are deemed not needed were deemed involuntarily separated from employment with the Company and became entitled to a special separation payment composed of (a) separation pay; (b) gratuity pay; and (c) applicable retirement benefits under the existing retirement plan. 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 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 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. Since the separation of the employees of your client is beyond their control, any and all amounts to be received by the employees who will be terminated, as a consequence thereof, are exempt from income tax and consequently from the withholding tax prescribed under Section 79, Chapter XIII, Title II of the Tax Code of 1997. (BIR Ruling No. DA-64-98 dated February 24, 1998) 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) It is, however, understood that the salaries and overtime pay including night differential pay and working on holiday premium pay of the subject employees up to the last working day are subject to income tax and consequently to the 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. cdll Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)