Tax Exemption of Separation Benefits Received by Employees under Redundancy Program

July 6, 1999 BIR RULING NO. 089-99 32 (B) (6) (b) SB-040-99 089-99 Sanidad Abaya Te Viterbo Enriquez & Tan Law Firm 2/F Transorient Maritime Building 66 Timog Avenue, Quezon City 1115 Attention: Atty . Edgardo R . Abaya Gentlemen : This refers to your letter dated June 16, 1999 requesting confirmation of your opinion that separation benefits to be received by employees/workers of your client, Engineering Construction Corporation of Asia (ECCO-Asia), a subsidiary of First Philippine Balfour (FPB) pursuant to a redundancy program are tax exempt. It is represented that ECCO-Asia is a duly registered domestic corporation engaged in the electrical and mechanical engineering works, fabrication and construction; that it has expanded into construction of power transmissions, oil refineries, power stations, telecommunications infrastructure and LPG Tanks; that it is accredited as an AAA Contractor, the highest rating given by the Philippine Contractors Accreditation Board; that notwithstanding the said accreditation, it was not spared by the economic crises that plague the Asian Region and beset the construction industry; that in response to said crisis, First Philippine Holding Corporation (FPHC) entered into a joint venture with Balfour Realty of the United Kingdom and formed First Philippine Balfour Realty (FPBR) with ECCO-Asia evolving as a subsidiary; that with its new parentage, ECCO-Asia draws on Balfour Realty's wealth of experience in the fields of Civil Engineering, railways, power engineering, building and building services and hopes to achieve its vision of being transformed into a "world class" firm; that the transformation requires building a core group based on present and projected levels of projects; that this entails workforce reduction in order to identify and establish competencies, skill and level needed to achieve the goals and vision of the Company; that likewise, restructuring/reorganization is apt to property put in place the right number and the qualified people in the organization; that all employees/workers affected by the redundancy program resulting from the reorganization shall be compulsorily terminated from work and shall receive a corresponding "redundancy separation pay/package"; and that considering that the employees/workers affected by the redundancy program are separated from employment for reasons beyond their control, you are of the view that any amount received as a consequence, such separation is exempt from taxes as contemplated under Section 32(B)(6)(b) of the Tax Code of 1997. In reply, please be informed that under 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 due of death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall not be included in gross income and shall be exempt from taxation under Title II of the Tax Code of 1997 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. 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. Such being the case, and since the separation of your client's employees/workers is due to your client's redundancy program resulting from your said client's restructuring/reorganization, such separation is therefore, beyond the control of said employees/workers. Hence, any and all amounts received by said employees/workers as a result thereof, are exempt from all taxes and consequently from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997 and implemented by Revenue Regulations No. 2-98. The payment of their salaries, however, is subject to income tax and consequently to withholding tax. (BIR Ruling No. SB-040-99 dated June 18, 1999) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)