BIR Ruling [DA-546-99]

September 21, 1999 BIR RULING [DA-546-99] Greenbelt Theaters, Inc. Greenbelt Square Bldg., Paseo de Roxas cor. Legaspi St. Ayala Center, Makati City Attention: Mr . Rolando S . Duenas Administrative Manager Gentlemen : This refers to your letter dated June 23, 1999 requesting for a confirmation of your opinion that the early retirement benefits to be received by your employees as a consequence of your cessation of business operations is not subject to withholding tax on compensation in accordance with Section 23(B)(6)(b) of the Tax Code of 1997. cdll It appears that Makati Theaters Inc. (MTI) is a corporation duly organized and existing under Philippine laws; that it is engaged in the management and operation of the Quad Theaters (now Glorietta I) in Makati City through an Operating and Management Agreement with Ayala Theaters Management, Inc. (ATMI); that due to spiraling costs of theater operations aggravated by the market downturn in the theater business in the Quad area, ATMI terminated MTI's services effective April 30, 1999; that as a result of the non-renewal of the aforesaid agreement, the management of the MTI decided to close its business operations effective June 16, 1999 and grant the employees early retirement benefits as a means of providing financial security to the employees after their separation; that the employees will be granted early retirement benefits in the form of three (3) months salary for every year of service and group term life insurance, medical and dental insurance and pension plans for the benefit of the employees and/or their dependents for five (5) years from the date of their separation from MTI; and that the premium payments on such group term life insurance, medical and dental insurance and pension plans will be shouldered in full by MTI, or in the event of its dissolution, its successors-in-interest. 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 your employees is beyond their control, any and all amounts to be received by them as a result thereof, are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. The payment of said employees' salaries, however, is 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)