Banco De Oro

December 21, 2007 BIR RULING [DA-679-07] 32 (B) (6) (b) 088-96 Banco De Oro 12 ADB Avenue, Ortigas Center, Mandaluyong City 1550, Philippines Attention: Mr. Ricardo V. Martin Executive Vice President Gentlemen : This refers to your letter dated December 20, 2007 requesting confirmation of your opinion that all amounts distributed to the covered employees of Equitable PCI Bank (EPCIB) upon the dissolution of EPCIB and the EPCIB Provident Fund as a result of the merger of EPCIB and Banco de Oro (BDO) are exempt from income tax and to the withholding tax. It is represented that BDO and EPCIB are banking institutions, duly organized and existing under Philippine laws and are both licensed to do business as universal bank by the Bangko Sentral ng Pilipinas (BSP), which have decided to merge. The merger of the two banking institutions has been approved by the Securities and Exchange Commission (SEC) to take effect on May 31, 2007 with EPCIB as the absorbed corporation and BDO as the surviving corporation. As a consequence of the merger, EPCIB shall be dissolved and shall cease to function as a universal bank; EPCIB will file notice for the cancellation of TIN as well as the cancellation of its registration to end-date the filing of required BIR forms/Returns. It shall file a correct short period return and pay the total tax due on the said return as required under Section 52 (C) of the Tax Code. EPCIB shall request the BIR the issuance of the tax clearance which then shall be submitted to the Securities and Exchange Commission to process the issuance of the Certificate of Dissolution. EPCIB's networks and operations shall be integrated with BDO pursuant to the approved Articles of Merger, with BDO being constituted as the surviving corporation. Upon EPCIB's dissolution, the employer-employee relationship between EPCIB and its employees will be terminated. All employees of EPCIB, by operation of law, shall cease to be an employee of EPCIB, but may be retained as employee of the surviving entity, BDO. Consequently the Management, upon integration of the two (2) institutions, decided to dissolve/terminate the Provident Fund of then EPCIB and distribute to the Fund members their contributions (both employee and hank contributions) including the earnings thereof. In reply, please be informed that the EPCIB Provident Fund is an employee's trust, the tax exempt qualification of which had been determined/adjudicated by the BIR on May 5, 2005 under Section 60 of the 1997 Tax Code which in pertinent part provides that "any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee." DTEScI However, under Section 32 (B) (6) (b) of the Tax Code, as amended, one of the exclusions from gross income referred therein is "any amount received by an official or employee or by his heirs from his employer as a consequence of separation of such official or employees 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." As earlier ruled by this Office in BIR Ruling No. 088-96, the amount received under an involuntary separation is exempt from taxes regardless of the employee's age or length of service. The phrase "for any cause beyond the control of the said official or employee" in effect 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 separation must not be of his own making. (Sec. 4 (f), Revenue Regulations (RR) No. 1-68; Sec. 2 (b) (2), RR 6-82, as amended; and BIR Ruling No. 088-96). The above-mentioned law requires the presence of these two sine qua non conditions in order that the separation pay of an official or employee may be exempt from income tax, viz .: (1) The official or employee's, separation from the service of his employer is due to death, sickness or other physical disability or for any cause beyond his control; and (2) The employer pays separation benefits to such official or employee separated from the service of his employer or to his heirs as a consequence of such involuntary separation. It is clear from the foregoing representations that the contemplated separation of the officials and employees from the service of EPCIB is neither of their own making nor choice, inasmuch as the same was due to the merger of EPCIB with BDO resulting into the dissolution of the absorbed corporation which is their employer. This also results to the termination of EPCIB's Provident Fund and the officials and employees of EPCIB ceasing to be Provident Fund members even if they will be employed by the surviving entity, which is BDO. In view thereof, and considering that Section 32 (B) (6) (b) of the Tax Code of 1997 contemplates of an actual or real severance/separation by the officials or employees from the service of their employer due to any of the abovementioned causes, any and all amounts received by them from the EPCIB as a result thereof including those from the Provident Fund (both personal and bank contributions including their earnings) and the money value of the accumulated unused vacation and sick leave credits, are exempt from income tax and consequently from the withholding tax prescribed by Section 79 of the Tax Code of 1997, as implemented by RR No. 2-98. (Sec. 2.78.1 (B) (1) (b), RR No. 2-98). It is understood, however, that the tax exemption does not include the company's payment for salary, if any, of its employees. (BIR Ruling No. 043-91 dated March 13, 1991) Furthermore, the effect of the dissolution of EPCIB would be the retrenchment of all its employees, and even if these employees may be absorbed by BDO, the surviving entity, such employment is considered as new employment considering that EPCIB and BDO are not one and the same because the existence of the first employer had already ceased by operation of law. Likewise, said merger would result to the dissolution of the Provident Fund, thus all contributions and benefits shall be returned to all covered employees. The distribution to the employees undoubtedly comes within the purview of any amount received from the employer as a consequence of separation due to causes beyond the control of the employees, hence, exempt from income tax pursuant to Section 32 (B) (6) (b) of the same Tax Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, if will be ascertained that the facts are different, then this ruling shall be considered as null and void. cSCTEH Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service