Separation Pay of Officials and Employees as a Result of Employer's Staff Reduction Program Exempt from all Taxes

November 5, 1986 BIR RULING NO. 230-86 29 (c) (7) (B) 125-84 230-86 Gentlemen : This refers to your letter dated October 21, 1986 requesting a ruling as to whether the Staff Reduction Program of the Bank of America NT & SA partakes of the nature of an involuntary separation; and whether the amounts to be received by the employees who will be separated under such program are exempt from income tax. It is represented that the Bank of America-Manila Branch is a foreign branch of the Bank of America NT & SA, California U.S.A. and currently employs 300 Filipino employees; that it recently embarked on a staff reduction program which was dictated by an urgent need to support two key directions that your corporate headquarters is pursuing: cost reduction and change in market focus; that for two years now, Bank of America NT & SA has been experiencing financial difficulties; that at year end 1985, it declared corporate losses amounting to $337 million; that for the second and third quarters of 1986, it reported losses of $640 and $23 million respectively; that as a result of such losses, the bank has mounted a massive expense reduction campaign world wide, that the bank has begun implementing a strategic direction to narrow down its market focus to a highly select customer base in order to fully exploit the advantages of its branch network all over the world; that the decision is expected to result in a radical reduction in the number of the bank's account relationship and thereby in the number of personnel required to service their requirements; that with the twin effort of controlling expenses effectively and refocusing of its business directions, the bank is inevitably faced with the need to cut its staff complement world wide; and that while it is a fact that the Manila Branch has not experienced any significant losses over the past years, your headquarters believes that the Manila Branch are overstaffed and has determined that a significant reduction of its manpower complement is required. In reply, I have the honor to inform you that pursuant to Section 29(c)(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 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" connotes involuntaries 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 or choice (Sec. 2(b)(2). Revenue Regulations No. 6-82). The separation of the officials and employees as a result of the staff reduction program of the bank falls within the purview of said phrase. Since the separation of the employees under the staff reduction program that bank is beyond the control of the said employees, any and all amounts to be received by them as a result thereof, are exempt from all taxes and consequently, from the withholding tax prescribed by Section 82, Chapter X, Title II of the Tax Code, as amended by Presidential Decree No. 1994. It is, however, understood that this tax exemption does not include the bank's payments for salary and cash equivalent of accumulated vacation and sick leaves, if any of the employees. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue TAN-T5150-J0923-A-4