BIR Ruling No. 035-80

April 17, 1980 BIR RULING NO. 035-80 L. M. Ermitao & Associates 3rd Floor, Zeta Building Salcedo Street, Legaspi Village Makati, Metro Manila Gentlemen : This refers to your letter dated March 7, 1980 requesting a ruling on whether the amount of P675,000.00 which the Chase Manhattan Bank N.A. Offshore Banking Unit in the Philippines offered to pay your client, Mr. Eduardo G. Fajardo as separation benefit and damages is exempt from income tax under Section 29(b)(7)(B) of the Tax Code, as amended. In reply thereto, I have the honor to inform you that pursuant to the final proviso of Section 1, Republic Act No. 4917 which was incorporated effective June 3, 1977 by Presidential Decree No. 1158-A in the Tax Code of 1977 as amended, as Section 29(b)(7)(B) thereof, 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 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 . aisadc The aforementioned law requires the presence of these two conditions in order that the employee benefits may be granted tax exemption: (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. 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. In other words, the separation must not be of his own making. (Section 4(f), Revenue Regulations No. 1-68 dated March 25, 1968 implementing R.A. 4917) However, in the case of Mr. Fajardo, there is as yet no actual separation from the service of the Bank. For, documentary evidence submitted show that even on appeal by the Bank with the Office of the President, Mr. Fajardo won his case entitled "Eduardo G. Fajardo vs. Chase Manhattan Bank, N.A., OBU in the Philippines and Randolph N. Earman, Jr.", NIRC Case No. STF-12-7641-78 originally instituted by him with the Ministry of Labor and decided in his favor by the matter ordering, among others, reinstatement and payment of his backwages. Such being the case, Mr. Fajardo cannot be considered as having been separated from the service of the Bank beyond his control, and therefore, whatsoever denominated, any payment that would be made by the employer Bank to Mr. Fajardo shall not be considered as a tax-exempt separation benefit within the contemplation of Section 29(b)(7)(B) of the Tax Code, as amended. Moreover, if the Supreme Court finally decides and affirms the decisions of the Ministry of Labor and the Office of the President in favor of Mr. Fajardo, but notwithstanding said decision, Mr. Fajardo chooses to be separated from the service of the Bank, whatever amount that would be paid to him by his employer as separation benefit shall not be exempt from income tax under Section 29(b)(7)(B) of the Tax Code, as amended, because then his separation from the service of the employer Bank is already for reason well within the control of said official, the separation now being his own making or choice. cdti Very truly yours, EFREN I. PLANA Acting Commissioner