Philippine Communications Satellite Corporation (PHILCOMSAT)

February 25, 2009 BIR RULING [SB-(017) 154-09] Sec. 32 (B) (6) (b);SB-165-2003 Philippine Communications Satellite Corporation (PHILCOMSAT) Telecoms Plaza Building, 316 Senator Gil Puyat Avenue, Makati City Attention: Atty. Bernadette Y. Blanco Legal Affairs & HR Manager Acting Special Assistant to the President Gentlemen : This refers to your letter dated October 05, 2006 requesting for confirmation of your opinion that separation benefits of your employees who may be affected by the company's retrenchment program are exempt from income tax and consequently from the withholding tax. aIHCSA It is represented that five (5) employees of Philcomsat were retrenched based on the company's existing retrenchment program effective thirty (30) days following the company's acceptance of their application; that the continuous implementation of the retrenchment program of the company is by reason of the grave business reverses that Philcomsat continues to experience notwithstanding the cost-cutting measures already being implemented at present to mitigate unnecessary expenses; that as an offshoot of the retrenchment, the employees concerned shall be paid their separation benefits in conformity with existing laws and company policies as had been done in the past; and that in the year 2003, Philcomsat retrenched some of its then employees whose separation pay was not made subject to income tax. In reply, please be informed that 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 pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. 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. The 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. Accordingly, this Office confirms your opinion that any and all amounts to be received by the employees who may be affected by Philcomsat's retrenchment program are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 and 12-2001. The payment of salaries, however, is subject to income tax and consequently to withholding tax. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service