Taxability of the Benefits to be Received by the Employees of the National Development Company (NDC) under the NDC Separation Incentive Program and Other Separation Benefits under its Provident Fund

October 23, 1995 BIR RULING NO. 166-95 53 (b) 000-000 166-95 National Development Company First Bank Bldg., 371 Sen. Gil J. Puyat Avenue, Makati Metro Manila Attention: Mr . Esmeraldo E . Sioson Assistant General Manager Gentlemen : This refers to your letter dated June 13, 1995 requesting for a ruling on the taxability of the benefits to be received by the employees of the National Development Company (NDC) under the NDC Separation Incentive Program and other separation benefits under its Provident Fund. prcd It is represented that NDC is a government owned and controlled corporation created by Commonwealth Act No. 182, having its own charter (P.D. No. 1648 as amended by P. D. No. 1846); that calling for a reduction in force in relation to its privatization program and charter, the NDC Board of Directors approved a Separation Incentive Program with the following benefits: 1. Gratuity benefits of 1.66 times basic salary for every year in service but not more than 24 months salary plus P2,000 for every year of service with NDC; 2. Cash equivalent of accumulated vacation, sick leave and company equity portion of a car loan (provided the employee has served as manager for at least two (2) years), and 3. Retirement benefits under existing retirement laws. that the Separation Incentives Program is available to all employee who are presently occupying plantilla positions; that application under the program shall be subject to management approval; that officers or employees may withdraw their application only prior to the approval thereof; and that any employee who stops working for NDC, whether availing of the Separation Incentive Program or not shall also be entitled to withdraw the entire amount of his contributions to the NDC Provident Fund as well as the corresponding accumulated earnings thereon plus NDC's counterpart contributions to the Funds and the corresponding proportional earnings thereon. In reply thereto, 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 controls 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 the said 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 or choice. The cash equivalent of vacation and sick leave credits given by the employer to his/its officials and employees or their heirs by reason of compulsory retirement of termination of employment for cause beyond the control of the employee is not subject to income tax and consequently; to the withholding tax on wages. (RMC No. 83-91; CIR vs. The Court of Appeals and Efren P. Castaeda, G.R. No. 96016 dated October 17, 1991). Since the separation of the employees of NDC under its Separation Incentive Program is not beyond their control considering that they have a choice whether to avail/apply or not for separation under the program, any and all amounts including terminal leave pay (sick leave and vacation leave credits), which the employees will receive as a result of their separation under the program, are subject to income tax and consequently to the withholding tax prescribed by Section 72, Chapter 10, Titles II of the Tax Code, as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended. llcd Moreover, pursuant to Section 58(b) of the Tax Code, as amended, any and all amounts to be received by the separated employees of NDC over and above their personal contributions to the NDC Employee's Provident Plan Fund shall be subject to income tax. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue