Separation Benefits Due to Retrenchment - Tax-Exempt

September 20, 1993 BIR RULING NO. 379-93 SEPARATION BENEFITS DUE TO RETRENCHMENT TAX-EXEMPT 28 (b) (7) (B) 68-92 79-93 Philippine Appliance Corporation 8377 Dr. A. Santos Avenue Paraaque, Metro Manila Attention: Mr . Dante G . Santos Chairman of the Board and Chief Executive Officer This refers to your letter dated August 6, 1993 requesting for a ruling on the taxability of the separation compensation which Philippine Appliance Corporation (PHILACOR) shall pay its employees under its forthcoming voluntary retrenchment program or early retirement program. It is represented that the energy crisis being experienced by the country has resulted in a severe decline in the market demand for your products; that this market erosion is anticipated to continue until 1996 when stability of power supply is attained through the country and consumer income improved; that in order to preclude operational losses, management has initiated a retrenchment program consisting of the reduction in work force sufficient for a 2-shift operation and the declaration of 30% of your total number of employees (which is equivalent to the third shift operations) as redundant; that PHILACOR will retrench and/or declare redundant an equivalent number of employees corresponding to the cancellation of the 3rd Shift, in two phases, as follows: 1st Phase Early Retirement Aug. 1 to 15, 1993 2nd Phase Compulsory Retrenchment Sept. 1 to 15, 1993 and/or redundancy 1st Phase is offered to all employees regardless of position and years of service, who will be entitled to the retrenchment's proper schedule of compensation which is inclusive of the company's Retirement Plan as required in the Retirement Law (RA 764) and the separation pay under the Labor Code. 2nd Phase In the event that the reduction of employees who will avail of the Early Retirement is less than the required number, the company will undertake a compulsory retrenchment program and/or a redundancy program that will entitle employees to a separation compensation as provided by law. In this connection, you explained that this so-called voluntary retrenchment program or early retirement program was undertaken by PHILACOR following management's decision to reduce its work shifts from three (3) shifts to two (2) shifts in order to prevent serious business losses; hence, separation from the service of the employees who availed of such program is beyond their control. 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 his heirs from his 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 said official or employee is exempt from taxes regardless of age or length of service. The abovementioned law requires the presence of these two conditions in order that the employee benefits may be granted tax exemption: (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. Since the separation of your employees due to organizational changes making their positions redundant and unnecessary is beyond their control, any and all amounts received by them as a result thereof are exempt from all taxes 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. Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to the withholding tax. (See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. Oct. 17, 1991). It is however, understood that this exemption does not include your payment of your employees' salaries. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void and we will hold you responsible especially the employee who made the representation. cdtech LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue