Tahanan Mutual Building Loan Association

February 17, 2009 BIR RULING [SB-(012) 101-09] Section 32 (B) (6) (b);SB-004-2006 dtd. 11/30/06 Tahanan Mutual Building Loan Association 9/F Ramon Cojuangco Building Makati Avenue, Makati City Attention: Ma. Luz Natividad A. Lim President Gentlemen : This refers to your letter dated November 13, 2008, requesting a confirmatory ruling on your opinion that the separation pay to be given to the employees of TAHANAN MUTUAL BUILDING AND LOAN ASSOCIATION pursuant to a manpower reduction program is not subject to income tax and consequently to withholding tax on wages pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. It is represented that TAHANAN MUTUAL BUILDING AND LOAN ASSOCIATION (TAHANAN, for short) with TIN: 001-879-655-000, is a corporation duly organized and existing under the laws of the Philippines; that TAHANAN will terminate the employment of employees whose positions are rendered redundant due to process improvements and automation of function resulting to a collapsing/merging of function which necessitates the reduction of current work force to match the reduction of work loan; that TAHANAN will be paying the affected employees one hundred percent (100%) of the basic monthly pay for every year of service in addition to the retirement benefits under TAHANAN'S retirement plan duly approved by BIR, if entitled; that TAHANAN further undertakes to pay the said employees their accrued vacation leaves, pro-rated 13th month pay and other benefits. In reply, please be informed that pursuant to Section 32 (B) (6) (a) and (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 because of 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 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. ATcaEH 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. Since the separation of the employees of TAHANAN will be due to company downsizing and, therefore, beyond their control, any amount to be received by them as a consequence of said separation is exempt from income tax and consequently from the withholding tax prescribed under Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. However, the payment of the 13th month pay and other benefits, in excess of the P30,000.00 threshold, and the salaries of the TAHANAN'S employees are subject to income tax and consequently to the withholding tax. (BIR Ruling No. SB-004-2006 dated November 30, 2006) Moreover, the commutation and payment of unused sick leave and vacation leave credits are likewise not subject to income tax and consequently to withholding tax. ( CIR vs. CA & Efren P. Castaeda ,GR 96016 prom. Oct. 17, 1991) 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. Very truly yours, Commissioner of internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service