BIR Ruling [UN-051-94]

February 10, 1994 BIR RULING [UN-051-94] Manila Peninsula Hotel, Inc. 9th Floor, BA-Lepanto Bldg. Paseo de Roxas, Makati, Metro Manila Attention: Atty . Poncevic M . Ceballos Legal Counsel Gentlemen : This refers to your letter dated January 7, 1994 stating that the Manila Peninsula Hotel, Inc. is offering a special retrenchment program, the features of which are as follows: cd A. Compensation Scheme Length of Service Benefit 5 years < 6 years 50% of the monthly salary 6 years < 7 years 60% of the monthly salary 7 years < 8 years 70% of the monthly salary 8 years < 9 years 80% of the monthly salary 9 years < 10 years 90% of the monthly salary 10 years < 11 years 100% of the monthly salary 11 years < 12 years 100% of the monthly salary 12 years < 13 years 100% of the monthly salary 13 years < 14 years 100% of the monthly salary 15 years and above 25% of the monthly salary that the hotel may grant additional incentives, financial or otherwise, apart from the foregoing features; that the program will be adopted to cushion the impact of financial losses that the hotel is currently experiencing and of the further severe financial dislocation forecasted during the interim that the Hotel will be undertaking renovation program for a period of one year and in the light of increasingly competitive market brought about by the opening of new hotels with no foreseeable significant improvement in tourism arrivals; that the company shall decide as to who shall be retrenched under the Program; In connection therewith, you are requesting opinion as to whether the benefit to be received by the employees as a consequence of the retrenchment program is exempt from 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 by 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 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. The abovementioned law requires the presence of these two (2) 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 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 under your Special Retrenchment 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)