BIR Ruling No. 008-11

January 19, 2011 BIR RULING NO. 008-11 Sec. 32 (B) (6) (b) of the Tax Code of 1997; BIR Ruling No. 379-93; BIR Ruling No. DA-603-99 Padilla Law Office 7/F Padilla-De Los Reyes Building 232 Juan Luna Street, Binondo Manila Attention: Atty. Sabino B. Padilla IV Gentlemen : This refers to your letter dated September 29, 2010 stating that your client, Our Lady of Lourdes Hospital, Inc. (Hospital), is a corporation organized under the laws of the Philippines and operates a medical facility located at P. Sanchez Street, Sta. Mesa, Manila; that on the other hand, the Sisters of the Holy Spirit (SSpS) is the religious congregation that owns and controls the Hospital; that over the past years, the Hospital has been experiencing serious financial losses in its operations, and for the first half of 2010, the losses amounted to P18,353,743.00; that because of the poor financial state of the Hospital and the fact that the complement of SSpS in the Philippines may no longer be able to manage the Hospital meaningfully in the long term, the Board of Trustees of the Our Lady of Lourdes Hospital has decided to close the Hospital and cease operations as an SSpS managed institution at the end of business hours on October 31, 2010; that on or before September 30, 2010, the Hospital shall send individual letters of termination to the over 500 rank-and-file supervisory and managerial employees of the Hospital, which termination shall take effect on October 31, 2010; that while the Hospital will officially close on October 31, 2010, the rank-and-file employees of the Hospital, represented by their Union, were informed of the decision of the Hospital to close during a conference before the Department of Labor and Employment's National Conciliation and Mediation Board, held last September 2, 2010; that the conference was in connection with a notice of strike filed by the Union of rank-and-file employees on account of a collective bargaining deadlock over economic matters that were to become part of a new collective bargaining agreement covering the period 2010 to 2013; that because of that announcement the notice of strike became moot and academic; that meanwhile, the managerial and supervisory employees of the Hospital have also been informed of the closure of the Hospital as an SSpS managed institution on October 31, 2010; that all employees of the Hospital were informed that the Hospital Management is looking for a third party that may lease the entire property of the Hospital and run the same independently of the SSpS; that all employees were informed, however, that there was no guarantee that all or any of them would be hired by whoever would lease the property and facility of the Hospital and operate the same as a medical facility, as the present management as well as the Sisters shall not have any participation in any entity that shall eventually operate the leased premises; that between October 28, 2010 and October 31, 2010, all the employees of the Hospital shall be paid their final salaries corresponding to services rendered for the second half of the month of October 2010; that in addition, while there is no legal obligation on the part of the Hospital to pay separation pay to the Hospital employees on account of the serious financial losses experienced by the Hospital, the Hospital Management has decided that, on or before October 31, 2010, in the interest of helping its employees due to loss of their jobs, the Hospital Management will: (a) Immediately allow employees eligible for retirement to be separated first and paid separation benefits in amounts equivalent to retirement benefits provided in Article IX of the collective bargaining agreement between the Union and the Hospital; (b) Thereafter, for other employees not eligible to retirement under the collective bargaining agreement, grant separation benefits equivalent to one month pay or one-half month pay for every year of service whichever is higher as mandated by Article 283 of the Labor Code. and that it goes without saying that based on Article IX of said collective bargaining agreement between the Union and the Hospital, those who shall be given retirement benefits after their separation from service, will be receiving an amount greater than one month pay or one-half month pay for every year of service under Article 283 of the Labor Code. HTAIcD Based on the foregoing representations, you now request for a ruling that the separation pay or retirement pay due to the affected employees on account of the closure of the Hospital effective October 31, 2010, is exempt from income tax and consequently from withholding tax. In reply thereto, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, 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. (Emphasis supplied) 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 these two (2) conditions in order that the employee benefits may be granted tax exemptions: (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 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 the employees of your client 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. Furthermore, 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) Finally, the payment of their salaries, is subject to income tax and consequently to withholding tax. (BIR Ruling No. DA-603-99 dated October 8, 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 null and void. aTEACS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue