BIR Ruling [DA-709-99]

December 28, 1999 BIR RULING [DA-709-99] 32 (B) (6) (b) SB-69-98 DA-709-99 Kimberly-Clark Philippines, Inc . M.C.P.O Box 1467 1200 Makati City Attention: Mr . Marino M . Abes Director, Human Resource Gentlemen : This refers to your letter dated November 19, 1999 requesting for a ruling that the separation benefits to be paid to your employees by reason of closure of your absorbent cotton operations are exempt from income tax and consequently from the withholding tax. It is represented that after 35 years of operations, a decision has been reached to close down Kimberly-Clark Philippines, Inc.' (KCPI) absorbent cotton operations at the San Pedro site effective December 1, 1999; that the decision to close the operation was based on a thorough review of all available options; that the key factors considered in the decision were your inherent cost disadvantage versus competition and the safety risk of your employees; that both factors arise from the fact that you use old, outdated, non-competitive equipment in your manufacturing process; that absorbent cotton is not one of KCPI's core global businesses and thus, you have not benefited from any transfer of global know-how to build competitive advantage in absorbent cotton manufacturing; that said move is not, in any way a reflection on the quality of people assigned in cotton operations, who have worked every hard and have done an excellent job for KCPI over the years; and that KCPI will be providing support to the people involved to assist them in their transition to alternative employment or, for some of the longer-serving employees, to assist in their retirement. cdlex 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 the 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 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 the closure of your absorbent cotton manufacturing operations 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. The payment of the salaries of the KCPI's employees, however, is 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 without force and effect. prcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)