BIR Ruling [DA-575-99]

October 7, 1999 BIR RULING [DA-575-99] MSF Tire and Rubber, Inc . Rm. 21 East Service Road South Superhighway, Muntinlupa City Attention: Mr . Buno Mason President Gentlemen : This refers to your letters dated April 30, 1999 and July 20, 1999 requesting for a ruling that the separation benefits to be paid to your employees by reason of cost cutting measures are exempt from income tax and consequently from the withholding tax. It is represented that MSF Tire and Rubber, Inc. suffered big financial losses due to the economic crisis which affected the region; that to survive, the Company implemented cost cutting measures in all its operations, including manpower reduction; that the first phase of this action involved the termination of 34 employees on May 15, 1999; that the second phase will involve 26 employees this July; and that the separation package that the company has extended to the affected employees includes: 1. cash equivalent of unused sick leave credits (pro-rated); 2. cash equivalent of unused vacation leaves for 1998; 3. cash equivalent of unused vacation leaves for 1999 (pro-rated); 4. 13th month pay (pro-rated); 5. 2 1/2 pay per year of service; and 6. proceeds of the provident fund. 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 from the service 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 due to cost cutting measures, and, therefore 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. cdlex The payment of your employees' salaries, however, and the pro-rated 13th month pay in excess of P30,000.00 shall be subject to income tax and consequently to the withholding tax (BIR Ruling No. SB-69-98 dated October 6, 1998) 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 (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)