BIR Ruling [UN-008-94]

January 10, 1994 BIR RULING [UN-008-94] Cuevas De la Cuesta & De las Alas Law Offices 11th Floor, Vernida IV Building Alfaro Street, Salcedo Village Makati, Metro Manila Attention: Atty . Celso P . De las Alas Gentlemen : This refers to your letter dated December 9, 1993 requesting for an opinion on whether or not the separation benefits due to Atty. Rolando de la Cuesta, a former director of the United Coconut Planters Bank (UCPB) are subject to income and/or withholding tax under the National Internal Revenue Code. It is represented that Atty. Rolando de la Cuesta was continuously a member of the Board of Directors of UCPB from July 15, 1975 to June 30, 1986; that during the annual stockholders' meeting of UCPB on June 30, 1986, the Presidential Commission on Good Government (PCGG) having sequestered and effectively gained control of 94.4% of the voting stocks of the corporation, nominated and elected a new set of directors, thereby effecting a wholesale change in the Board; and that as a result thereof, Atty. De la Cuesta, who was then less than 50 years of age was separated from the service of UCPB; and that as a consequence of such separation, Atty. de la Cuesta is entitled to monetary benefits which will be drawn from the BIR-approved Retirement Plan Fund of UCPB. In reply, 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 by 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 income tax 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 must not be asked for or initiated by said official or employee. The above-mentioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemption, viz: (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 said official or employee ; and (2) The employer pays benefits to the official or employee of his heirs as a consequence of such separation. Accordingly, since the separation of Atty. de la Cuesta is beyond his control, any and all amounts received by him as a result thereof are exempt from income tax, and consequently, from the withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. Moreover, his terminal leave pay, i.e., the accumulated vacation and sick leave credits which is part of the separation pay is also exempt from income tax. (see CIR vs. C.T.A. and Efren P. Castaeda, G.R. No. 96016 prom. October 17, 1991). It is however, understood that the salary of Atty. de la Cuesta is subject to income tax. (BIR Ruling No. 379-93 dated September 20, 1993). cdtech Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)