Tax Consequences of PNB Privatization

August 6, 1996 BIR RULING NO. 088-96 28 (b) (7) (B) 000-00 088-96 Philippine National Bank PNB Financial Center Roxas Blvd., Metro Manila Attention: Mr . Valentin A . Araneta Senior Executive Vice President Gentlemen : This refers to your letter dated March 21, 1996 requesting confirmation of your opinion that: "1. The money value of the unused leave credits that will be received by PNB employees (as a result of the Bank's privatization) is exempt from income taxation, their separation from the government service being involuntary on their part; and cdtech "2. All amounts over and above the employees' personal contributions to the PNB Provident Fund (Fund) to be distributed to them upon the dissolution of the Fund as a result of the privatization of PNB are likewise not subject to income tax." It is represented that under Section 6 of Executive Order No. 80 (the 1986 Revised PNB Charter), it is provided that the PNB Charter shall continue to have force and effect until the Bank's certificate of incorporation is issued by the Securities and Exchange Commission (SEC), at which time, said PNB Charter shall cease to have force and effect and shall be deemed repealed; that PNB shall then be considered a privately organized bank subject to the laws and regulations applicable to private bank's; that likewise, PNB shall cease to be government-owned or controlled corporation subject to the coverage of service-wide agencies such as the Commission on Audit and the Civil Service Commission (CSC); that as a result of the Bank's privatization, all PNB employees shall, by operation of law, be deemed separated from the government/civil service; that the PNB Provident Fund was created pursuant to Section 11(f) of E.O. No. 80; and that upon the repeal of E.O. No. 80 or of the PNB Charter as provided in Section 6 thereof, the PNB management (as a private bank) may terminate its existing Provident Fund by dissolving it and distribute to the Fund members their contributions thereto (both personal and Bank shares), including the earnings thereof. In reply, please be informed that the PNB Provident Fund is an employees trust, the tax exempt qualification of which had been determined/adjudicated by the BIR on April 11, 1969 under then Section 56(b) [now Section 53(b)] of the Tax Code which provides that any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee of distributee . However, under 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 of such official or employees 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, 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), Revenue Regulations No. 1-68; Sec. 2(b)(2), Revenue 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 cdta (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 representations that the contemplated separation of the officials and employees from the service of PNB, a government-owned and controlled corporation is not of their own making or choice since it will be due to the privatization of PNB and the consequent transfer of ownership of the majority of the bank's equity from the National Government to the private sector resulting in the repeal of the PNB Charter, the possible termination of its existing Provident Fund for the employees, and the officials and employees of PNB ceasing to be Provident Fund members even if still employed with PNB as a private bank. In view thereof, and considering that Section 28(b)(7)(B) of the Tax Code contemplates of an actual or real severance/separation by the officials or employees from the service of their employer due to any of the abovementioned causes or even if they are retained in the employ of PNB which is on a privatization process and its Provident Fund is dissolved and distributed to the said employee-members, any and all amounts received by them from the PNB as a result thereof including those from the Provident Fund (both personal and Bank contributions including their earnings) and the money value of the accumulated unused vacation and sick leave credits, are exempt from income tax; 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 is understood, however that the tax exemption does not include the company's payment for salary, if any, of its employees. (BIR Ruling No. 043-91 dated March 13, 1991) Furthermore, the effect of the privatization of PNB would be the retrenchment of all its employees, and if ever there would be an employee who would not be rehired by the new PNB, such employment is considered as new employment and past service records are disregarded. Likewise, said privatization would result to the dissolution of the Provident Fund, thus all contributions and benefits shall be returned to all employees, the privatization being beyond the control of the employees. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, if will be disclosed that the facts are different, then this ruling shall be considered null and void. casia Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue