BIR Ruling [UN-022-94]

January 18, 1994 BIR RULING [UN-022-94] FirstBank 8787 Paseo De Roxas, Makati Metro Manila Attention: Atty . Florentino D . Mabasa, Jr . Gentlemen : This refers to your letter dated December 7, 1993 stating that the First Philippine International Bank (FirstBank) formerly Producers Bank of the Philippines issued Administrative Circular No. 8 dated September 14, 1993 offering and Early Retirement Plan (ERP) to all employees; that under said circular, FirstBank will restructure its organizational set-up in line with its on-going rehabilitation; that FirstBank has given its officers and employees that option to avail themselves of the benefits of the ERP in order to provide financial security to those whose application will be accepted; and that the bank has the sole and final option to accept or reject any application for the ERP. cd In connection therewith, you are requesting a ruling as to whether or not the benefits or financial package to be received under the ERP as well as the cash equivalent of vacation and sick leave credits of the employees are subject to tax. 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 physical disability or for any cause beyond the control of said official on 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. The abovementioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions (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 or his heirs as a consequence of such separation. Since the separation of your employees under your Early Retirement Program 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 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, the terminal leave pay i.e., the accumulated vacation and sick leave credits which is part of the tax-exempt separation pay is also exempt from tax (See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 Prom. October 17, 1991) The payment of their salaries however, is subject to the withholding tax BIR Ruling No. 035-93 dated January 15, 1993). Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)