BIR Ruling No. 237-82

August 17, 1982 BIR RULING NO. 237-82 029-c 000-00 237-82 Procter and Gamble Philippines Manufacturing Corporation P.O. Box 302, Manila Attention: Atty . F . P . Flores Legal Counsel Gentlemen : This refers to your letter dated April 13, 1982 requesting confirmation of your opinion that the entire amount to be received by your employees under a proposed separation plan is exempt from income tax. cdtech It is represented that because of the adverse effects of the current economic recession, that company will undertake a redundancy program as a consequence of a corporate reorganization directed towards efficiency, economy, and simplicity in business operations, including changes of work processes from manual to automation; that the redundancy program will be effected under a separation plan scheduled for implementation from July, 1982 to June, 1983 covering employees qualified for early retirement in accordance with the approved Pension Plan of that company; that the said employees who are more than 55 years of age with at least 25 years of service will be asked to avail of early retirement benefits this year and not to remain in the service until they attain the compulsory retirement age of 60 years; and that upon retirement, the so-called early retirees shall receive a special supplementary pay roughly equivalent to the total base pay they would have received if they continue to work until they reach 60 years of age, in addition to their retirement pay under the company's Retirement Plan. In reply, please be informed that pursuant to Republic Act No. 4917 (now Section 29(c)(7)(A), NIRC), the retirement benefits received by officials and employees who have been in the service of the same private firm for at least ten (10) years and who are not less than fifty (50) years of age at the time of retirement are exempt from all taxes provided that the retirement benefits are in accordance with a reasonable private benefit plan maintained by the employer. Records of this Office show that the Retirement Plan for the employees of Procter & Gamble Philippine Manufacturing Corporation, otherwise known as the P & G PMC Pension Plan was originally approved by the Bureau of Internal Revenue on January 29, 1969; that its latest amendments as of July 1, 1981 was approved on August 6, 1981; and that the said Plan provides for normal retirement of the employee-members at "age sixty (60) for both men and women", and early retirement "at any time after reaching age fifty-five provided he has completed not less than twenty-five years of continuous employment". Such being the case, the early retirement benefits to be received under the P & G PMC Pension Plan by the employee-members who would choose to retire upon the attainment of more than 55 years of age with at least 25 years of service with that company (No. 18, Art. II, Plan) shall be exempt from all taxes. However, pursuant to the final proviso of Section 1, Republic Act No. 4917 (now Section 29(c)(7)(B), NIRC), 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 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 phrase "for any cause beyond the control of the 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. In other words, the separation must not be of his own making or choice. (Sec. 4(f), Revenue Regulations No. 1-68 dated March 25, 1968 implementing R.A. No. 4917) Accordingly, since as envisioned by that company's proposed separation plan, the employees may or may not avail of early retirement benefits and consequently, of the special supplementary pay, the employees who qualified and opted to avail of the aforementioned separation plan without waiting for their normal and compulsory retirement age of 60 years cannot be considered as having been separated from the service of that company beyond their control because such separation is brought about by reason of their consent thereto. In view thereof, this Office is of the opinion as it hereby holds that the retirement benefit payments under the P & G PMC Pension Plan are exempt from all taxes but the special supplementary pay to be received by the so-called early employee-retirees in accordance with the company's proposed separation plan consisting of an amount roughly equivalent to the total base pay they would have received if they continue to work until they reach 60 years of age shall be subject to income tax and, consequently, to the withholding tax. (Sec. 2(B)(6)(a) and (b), Rev. Regs. No. 20-81 dated Dec. 16, 1981; Sec. 9, Rev. Reg. No. 1-82 dated March 18, 1982 implementing B.P. Blg. 135) Moreover, the employer-company's payments for the salary and cash equivalent of accumulated vacation and sick leaves, if any, of the employee-retirees shall also be subject to the withholding tax. Very truly yours, RUBEN B. ANCHETA Acting Commissioner