Eligibility for Tax Exemption of the Benefits Payable under Staff Reduction Program

April 5, 1989 BIR RULING NO. 058-89 28 (b) (7) (B) 035-89 058-89 Gentlemen : This refers to your letter dated March 17, 1989 requesting in behalf of your clients, American Home Assurance Company, The Philippine American General Insurance Company and Philippine Home Assurance Corporation, a ruling on the eligibility for tax exemption of the benefits that will be payable under your clients' staff reduction program, pursuant to Section 28(b)(B) of the Tax Code. cdtech It is represented that it was recently decided by your clients to undertake a corporate reorganization wherein the operations of the three entities will be consolidated in one company; that the corporate reorganization will naturally result in the redundancy of common job items which will require a staff reduction of approximately 33-38% of the present workforce (from the present 645 to approximately 400-430) to prevent further incurrence of unnecessary overhead expenses; that in this regard, your clients have undertaken a staff reduction program which would cover initially employees who, after being informed by your clients of their decision to reduce staff, consented to being separated from employment; that these employees will be paid separation pay and incentives benefits; and that separation from employment under the proposed staff reduction program may be considered as termination "beyond the control of the employees" based on the following reasons: (1) your clients will be responsible for the initiation and implementation of the program. The purposes of the staff reduction program are to avoid duplication of positions and functions in the successor company when the corporate reorganization is effected and also to minimize overhead expenses. These are purely corporate determinations beyond the control of the employees; and (2) the selection of the employees to be separated (from among the employees who have consented to their separation from the service) depends upon the reserved right, sole will, judgment and discretion of their employers. 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 or employee or by his heirs from his employer as a consequence of separation by 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 abovementioned 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 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 the aforesaid employees from the service of your clients is beyond their control, any and all amounts received by them as a result thereof, are exempt from all taxes and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. It must be understood, however, that any benefits given under the abovementioned circumstances must be in accordance with the terms of an existing plan or one that falls under the law, i.e., one-half month for every year of service. (Section 14, Rule I, Book VI, Labor Code) Finally, the tax exemption does not include company's payment for salary and cash equivalent of accumulated vacation or sick leaves, if any. cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner