BIR Ruling [DA-624-99]

November 3, 1999 BIR RULING [DA-624-99] Westmont Bank 411 Quintin Paredes Street Binondo, Manila Attention: Mr . John Anthony B . Espiritu President Gentlemen : This refers to your letter dated October 18, 1999 requesting for a ruling that the separation benefits to be received by your employees as a result of their separation under the Early Separation Program of Westmont Bank are exempt from taxes pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. It is represented that Westmont Bank ( Westmont ) is contemplating on restructuring its organization in view of its rehabilitation and the ongoing computerization/automation of business transaction processes; that the restructuring is expected to make Westmont more competitive in responding to the demands of the banking public; that the restructuring requires, among others, the retention of a highly qualified and competent corps of personnel who will continue to effectively carry out the activities of and successfully achieve the goals set by Westmont; that Westmont has implemented an Early Separation Program (ESP) which, in general, provides for the grant of special separation benefits to Bank officers and employees who would be separated under the program to assist them in establishing another career outside of Westmont; that the ESP has the following major feature: "1. It is non-recurring, extra-ordinary and non-precedent setting; "2. the program is totally separate from, and independent of, the Bank's regular retirement under its present CBA. It is not an amendment to or a modification of the Bank's regular retirement under the CBA; "3. While the ESP provides for the grant of special separation benefits, it is with the full understanding that it will be Management's sole discretion to determine whose services may be dispensed with, as well as the effectivity dates of such separation. "1. The ESP benefits package consists of the following : "a. Separation benefits per year of service (inclusive of regular retirement benefits) computed based on the amount of basic salary at the time of separation, viz : Length of Service Separation Benefits Less than 9 years 100% 9 to less than 15 years 175% 15 years and over 200% "b. Money value of accumulated vacation and sick leave credits computed based on the amount of basic salary at the time of separation. "c. Proportionate amount of year-end payments (i.e. one month basic salary as Christmas Bonus, and one-month basic salary as 13th Month Pay) computed based on the amount of basic salary at the time of separation." and that Westmont will determine those who may retire/resign under the Early Separation Program. 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 aforementioned 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 or his heirs as a consequence of such separation. Since the separation of Westmont's employees and officers 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. 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) However, the payment of the employee's salaries, and the 13th month pay, bonuses and other benefits in excess of P30,000 shall be subject to income tax and consequently to withholding tax. (BIR Ruling Nos. DA-578-99 dated October 6, 1999; DA-579-99 dated October 6, 1999) 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group