Financial Assistance Received by a Dismissed Employee from Former Employer Subject to Income Tax

June 13, 2001 BIR RULING NO. 022-01 Mrs . Luzviminda A . Salvador Blk. 7, Lot 6, Montavilla Subdivision Burgos, Montalban, Rizal M a d a m : This refers to your letter dated June 19, 2000 requesting for a ruling that the financial assistance given to you by your former employer BPI Family Bank by reason of your dismissal and/or termination is exempt from income tax and consequently from the withholding tax. It is represented that you started working with BPI Family Bank in 1976 and rose from the ranks to become Assistant Manager with a monthly compensation of P36,385.00 at the time you were dismissed; that to augment your monthly income, sometime in 1990, you obtained loans to buy stall rights in a public market but unfortunately, the store was razed by fire five months later and with it, all the merchandise; that from then on, you had to resort to further borrowings to pay your past loans and/or obligations and their interests as well as to sustain your family; that even if payments were made, the same were applied only to interests causing your indebtedness to bloat due to late payments as well as penalty charges; that in trying to cope up, you were forced to resort to temporary borrowings from bank tellers, but you made sure that the amounts were replenished as soon as possible resulting to no losses to the bank; that the borrowings from the bank was revealed by the bank tellers and after suspension, you were terminated for breach of trust and violation of standard procedures; that in contesting your dismissal, it was your submission that the same was too harsh considering your almost 23 years in service; that in seeking clemency, you pleaded to be allowed to receive instead your retirement benefits but the bank refused and terminated your services; that you filed a case for illegal dismissal and payment of retirement benefits; that on March 27, 2000, Labor Arbiter Daisy G. Cauton-Barcelona rendered a decision, to wit: "The rule is well settled that in termination cases, the burden of proving just and valid cause for dismissing an employee rests upon the employer and failure on his part shall result in a finding that the termination is unjustified. At bar, we find the respondent bank was able to carry out its burden of proof. As a matter of fact, respondent does not need to prove anything as the letter of complainant dated March 10, 1999 to the president of respondent bank admitting that she has deviated from existing policy and seeking clemency that she be paid her retirement benefits is adequate to sustain her termination. For, loss of confidence is one of the valid grounds for termination of employment. More so because complainant's position requires full trust and confidence. As a managerial employee who is tasked to perform key and sensitive functions, she is thus bound by more exacting work ethics. DIHETS However, since it has been established that every centavo has been accounted for and that her employment history has been proven almost impeccable except for a written reprimand on February 15, 1991, for humanitarian grounds, we find it equitable to grant complainant financial assistance equivalent to one (1) month salary for every year of service instead of the retirement package prayed for. . . ." 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 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.(emphasis supplied) 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 . As amply stated in the decision, BPI Family Bank was able to prove the valid and just cause of the dismissal. Your careful orchestration of borrowing money from the bank tellers manifested your full discernment over the consequences of your act, considering further that you are a high ranking official. Thus, your acts defied the word involuntariness and the condition that the separation is due to any cause beyond the control of an official or employee was not met. There is a valid dismissal considering further that Articles 283 to 284 of the Labor Code of the Philippines provided for circumstances that an employer may terminate an employment such as serious misconduct or willful disobedience by the employee of the lawful orders of his employer or representative in connection with his work and fraud or willful breach by the employee of the trust reposed in him by his employer or duly authorized representative. The granting of the financial assistance is likewise not a consequence of separation due to a cause beyond the control of the employee. The same was due to humanitarian ground which our courts and labor tribunals refer to as "compassionate justice." The law, while affording full protection to labor does not authorize undeserved privilege. In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer. (Republic Flour Mills, Inc. vs. Comm. & CTA., L-25602, Feb. 18, 1970; Comm. of Customs vs. Phil. Acetylene Co., L-22443, May 29, 1971.) In other words, taxation is the rule and exemption, the exception, and, therefore, he who claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms "too plain to be mistaken and too categorical to be misinterpreted." (Comm., vs. Kiener Co. Ltd., L-24754, July 18, 1975; Reagan vs. Comm., L-26379, Dec. 27, 1969). An exemption from the common burden cannot be permitted to exist upon vague implication or inference. (Asiatic Petroleum Co., vs. Ylanes, 49 Phil. 466; Manila Electric Co. vs. Vera, L-29987, Oct. 22, 1975) In view thereof, since your separation was not due to causes aforementioned, any amount to be received by you as a consequence of your dismissal from the service is subject to income tax and consequently to 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. CHATcE Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue