BIR Ruling [DA-603-99]

October 8, 1999 BIR RULING [DA-603-99] Jimenez & Associates Law Offices Suite 9002 Aurora Tower, Araneta Center Quezon City Attention: Atty . Ramon T . Jimenez Gentlemen : This refers to your letter dated July 14, 1999 requesting on behalf of your client, Ma-ao Sugar Central Co., Inc., for a ruling as to the taxability of the separation package that its employees will receive under its closure program. LexLib It is represented that Ma-ao Sugar Central Co., Inc. (Central) is a corporation duly registered with the Securities and Exchange Commission (SEC) and operates a sugar central in Barangay Ma-ao, Bago City; that for the past seven years, the Central has suffered serious losses in its operations/financial reverses causing impairment of the company's capital and consequently, deterioration of milling equipment because of the following factors: a) Lack of financial capability, inadequate maintenance of machinery, equipment and vehicles; b) Bleak outlook for the sugar industry caused by depressed world market prices and depletion of demand for Philippine-produced sugar; and c) The company is suffering from the effects of the world currency crisis affecting all sectors of economy in the Asian Region; that because of the above-mentioned circumstances, the Central management will cease operations effective August 16, 1999 which will affect the jobs of approximately 273 regular and 174 seasonal employees including management personnel; that all employees, prior to separation, will be given the required 30-day notice under the Labor Code, or, alternatively, in order to help them during the said period, the management will grant a salary advance equivalent to 30 days, which is to be paid on July 16, 1999; that this way, the employees will have at least one month's pay as they seek employment elsewhere; that from this date, employees need not report for work; that while there is no legal obligation to pay benefits under extreme conditions of serious financial losses in the past years, management has decided that, in the interest of helping workers due to loss of their jobs, management will: a) immediately allow employees eligible for retirement to be separated first and be paid separation benefits in amounts equivalent to retirement benefits as provided in Art. XX of the CBA with the Ma-ao Sugar Central Supervisors Union and of the CBA with Allied Workers Association of the Philippines, Ma-ao Central Chapter (NACUSIP); b) thereafter, for other employees not eligible to retirement, grant separation benefits in the amounts equivalent to a pro-rated computation of the retirement benefits of workers under both CBAs until all will have been terminated with this proposed financial assistance. LibLex that because of extreme financial crisis, and unavailability of enough funds to pay in full the above-stated separation benefits, management shall grant said assistance in staggered fashion; that the management shall post a performance bond in an amount to be determined by the DOLE Regional Office to assure the Department and the employees that the remaining amounts of assistance to be extended to the workers will be paid on the due dates; and that a maintenance crew will be retained at the site of the sugar central to continue to service equipment/machinery; that a skeletal work force, consisting of office, technical, accounting, property and security personnel will be maintained to process receipts of company receivables and payments of outstanding company obligations. 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 . (Emphasis supplied) 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. cdll 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. Since the separation of the employees of your client is beyond their control, any and all amounts that they will receive as a result thereof, is exempt from income tax and consequently, from withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. Furthermore, 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) Finally, the payment of their salaries, is subject to income tax and consequently to withholding tax. llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)