BIR Ruling [UN-070-94]

February 22, 1994 BIR RULING [UN-070-94] IBM Philippines, Inc. IBM Building, 8757 Paseo de Roxas Makati, Metro Manila Attention: Mr . Lauro L . Abano Manager of Personnel and Staff Services Gentlemen : This refers to your letter dated January 5, 1994 stating that suppliers of Information Technology (IT) products and services worldwide are experiencing staff and fierce competition; that the lowering of prices of most computer products is exerting pressure on the profit margins; that advances in technology have packed more speed, capacity and versatility in even smaller products, enabling customers to "downsize" their requirements at even lower prices; that while all this dramatic progress is highly beneficial to I. T. users, the challenge to I.T. suppliers is to become and stay more efficient, more productive so as to produce and supply at the lowest cost; that this could be achieved by streamlining the company's operations, reducing its operating expenses, restructuring and making better use of its resources; that this world-wide phenomenon neither IBM nor the Philippines is an exception. Thus, IBM recently embarked on a special transition program ("the program"). Employees who will be 50 years old before December 31, 1994 and who have served a minimum of 15 years (eligible under the current Retirement Plan), can avail of added benefits given under the Program upon separation; that non-retirable employees whose positions shall be affected by the restructuring may also avail of the separation benefits as defined by your program; that under the program, it is possible for an eligible employee to continue his employment if he does not avail of the benefits; that those separated under this Program, consent to separation, receive payment ranging from 15 to 24 months salary, depending on the number of years of service and where eligible remain entitled to retirement pension. In connection therewith, you now request a ruling as to whether or not the additional lump sum benefits (plus the benefits under the BIR-approved IBM Retirement Plan) to be received by the officers and employees under the aforesaid proposed retrenchment program are 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 by 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 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, which means that the official or employee being separated from the service requested for such separation and not as in the this case, wherein the separation of the employees and officers of the Company is brought about by its retrenchment program resulting in the reduction of the manpower of the Company. The abovementioned law requires the presence of these two (2) condition 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; and (2) the employer pays benefits to said official or employee or his heirs as a consequence of such separation. Since the separation of the employees and officers of your company is beyond their control, any and all amounts received by them 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, 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, O.R. No. 96016 prom. October 17, 1991) The tax exemption does not include the Company's payment of salaries and 13th month pay, if any, of the concerned officials and employees. (BIR Ruling No. 379-93) Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)