Whether Mantrade Development Corporation Correctly Withheld Taxes from the Retirement Benefits of Employees Given under a Voluntary Retirement Program Offered by the Company to All Employees Regardless of Age and Length of Service

January 6, 1995 BIR RULING NO. 001-95 28 (b) (7) (B) 000-00 001-95 ATTY. MARIA ANA C. SISON 5th Floor, Dominion Bldg. 833 Pasay Road, 1200 Makati Metro Manila M a d a m : This refers to your letter dated November 8, 1994, requesting for a ruling on whether your client, Mantrade development Corporation, correctly withheld taxes from the retirement benefits of employees given under a voluntary retirement program offered by the Company last September to all employees regardless of age and length of service. LexLib Documents submitted that on December 31, 1994, the lease contract of your aforementioned client on its main office premises in Pasong Tamo will expire; that as a consequence, it may have to relocate, but the only place available in Makati within its affordability is much smaller in area than its present site; that on the same day, it may also have to stop its existing operations of its Sucat branch per Nissan's instructions; that all these uncertainties, aggravated by the marked downturn in its business since it reopened in the middle of June this year, compelled it to take emergency cost-saving measures, on of which is a voluntary retirement program open to all employees regardless of age and length of service; and that employees who opt to retire under this program shall be paid in accordance with the CBA/company policy on reduction of Company staff. In reply, please be informed that pursuant to Section 28(b) (7) (B) of the Tax Code, as amended, any amount received by an official of employee or by his heirs from the employer as a consequence of separation of such official or employee 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 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" 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), Rev. Regulations No. 1-68; Sec. 2(b) (2), Rev. Regulations No. 6-82, as amended] The abovementioned 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 taxes, 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 facts that the separation of the officials and employees from the service of the company is of their own making because the Voluntary Retirement Program of your client is availed of by its officials and employees voluntarily. Such being the case, the separation benefits to be received by the employees or officials who will apply or avail of your client's Voluntary Retirement program are subject to income tax and consequently to the withholding tax considering that their separation is voluntary or initiated by the employees themselves. Only separation benefits paid to employees by their employer due to their involuntary separation therefrom as contemplated under Section 28(b) (7) (B) of the Tax Code, as amended, and as implemented by Rev. Regulations Nos. 1-68 and 6-82, as amended, may be exempt from income tax. (BIR Ruling No. 12-91 dated January 29, 1991) This ruling revokes all previous BIR Rulings and other similar rulings granting tax exemption to employees or officials of a company who voluntarily opted to avail of the benefits of a voluntary separation benefit package being offered by an employer. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue