BIR Ruling [DA-658-99]

November 29, 1999 BIR RULING [DA-658-99] National Steel Corporation 377 Sen. Gil Puyat Avenue Makati City Attention: Ms . Mary Mylene T . Santos Senior Manager - Corporate Admin. Gentlemen : This refers to your letter dated November 11, 1999 requesting for a confirmation of your opinion to the effect that the availment of the provisions on early retirement under the company's retirement plan by your employees is considered "beyond the control of the employees" under Section 32(B)(6)(b) of the Tax Code of 1997 and thus exempt from income tax and consequently from the withholding tax. Documents presented disclosed that in its ultimate effort to minimize actual serious losses and prevent imminent financial reverses due to lack of raw materials and other critical supplies, the Management of National Steel Corporation (NSC) is constrained to temporarily suspend operation effective November 7, 1999; that all employees who have earned and have available vacation leave credits must go on forced leave immediately, unless their services are still required based on the schedule prepared by Division / Department Heads; that employees who have exhausted their vacation leave credits will continue to attend to any available work as the demands of the company may warrant until the temporary suspension of operation takes effect; that as a result of the forced leave, an employee is working with pay ranging from 3 days per month to only 2 - 3 days per week depending on the work requirement of the employee; that the company shall resume operations on or before the period of six months from November 7, 1999; that because of the above present condition of NSC and the dilemma of the employees, there is no more other option except to involuntarily avail of the ERP by qualified employees so they can legally look for another job or work with another company in order to sustain the basic needs of his/her family; that the company has pushed the employees against the wall to avail the ERP; that the Department of Labor and Employment was also notified regarding the temporary closure of the company; and that it is a public knowledge that NSC has a serious financial liquidity problem. In reply, please be informed that the NSC Employee's Retirement Plan which was approved by the BIR is a reasonable retirement benefit plan within the contemplation of Section 32(B)(6)(a) of the Tax Code of 1997. Pursuant to No. IV(B)(2) of the Provisions for NSC Employees' Retirement Plan which provides, viz: IV. OPTIONAL RETIREMENT DATES / BENEFITS: Optional dates / benefits are as follows: A. . . . B. Early Retirement Plan Early retirement may either be: 1. . . . 2. At the employees' option, after ten (10) years of service (irrespective of age) An employee, at his option may retire at any time after completion of ten (10) years of service with the Company; the retirement benefit applicable in such cases shall be as follows: llcd 10 yrs. of Service Credits 50% of Normal Retirement (1.0 mo.) 11 yrs. of Service Credits 55% of Normal Retirement (1.1 mo.) 12 yrs. of Service Credits 60% of Normal Retirement (1.2 mo.) 13 yrs. of Service Credits 65% of Normal Retirement (1.3 mo.) 14 yrs. of Service Credits 70% of Normal Retirement (1.4 mo.) 15 yrs. of Service Credits 75% of Normal Retirement (1.5 mo.) 16 yrs. of Service Credits 80% of Normal Retirement (1.6 mo.) 17 yrs. of Service Credits 85% of Normal Retirement (1.7 mo.) 18 yrs. of Service Credits 90% of Normal Retirement (1.8 mo.) 19 yrs. of Service Credits 95% of Normal Retirement (1.9 mo.) 20 yrs. of Service Credits 100% of Normal Retirement (2.0 mo.) an employee of NSC, at his option may retire at any time after completion of ten (10) years of service of irrespective of age. In addition thereto, the 3 days per month or the 2-3 days per week work pay of employees notified to report for work, depending on the services required, gave the other employees no other option except to involuntarily avail of the ERP by qualified employees so they can legally look for another job or work with another company in order to sustain the basic needs of his/her family. Thus, 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 he 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 involuntary availment of the benefits of the NSC Retirement Plan is a consequence of the forced leave and the temporary closure of the company and, therefore, beyond the employees' 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 the employees' salaries, however, is subject to income tax 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. cdlex Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)