BIR Ruling [UN-088-94]

March 8, 1994 BIR RULING [UN-088-94] Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 4th Floor, King's Court Makati, Metro Manila Attention: Atty . Carlos G . Baniqued Gentlemen : This refers to your letter dated February 8, 1994 requesting confirmation of your opinion that the benefits to be paid by The Coca-Cola export Corporation (TCCEC) (Philippine Branch) to its employees who shall avail of its Early Retirement Program are exempt from income tax and consequently, from the withholding tax. cdtech It is represented that TCCEC is in the process of restructuring its organization and realigning functions; that the reorganization, which is intended to take effect in March 1994, is necessitated by the increasing and changing demands of the business, the charged relationship with its bottle Coca-Cola Bottlers Philippines, Inc. (CCBPI) (i.e. one of the strategic planning and consultation on new and improved technology) and the demand in the organization for higher skills; that as an inevitable consequence of the reorganization, the skills of some employees would prove wanting and inadequate in the face of improved technology and demand for higher and more sophisticated skills requirement; that TCCEC will have to extensively realign job responsibilities and provide new skills to current employees through rigid training and/or reorientation; that TCCEC has reorganized that such changes will likely cause undesirable stress and difficulty for those employees who have become accustomed to the previous inefficient methods; that the older employees in the company are also anticipated to encounter undue stress and difficulty in coping with the demands of reconfigured and more demanding jobs occasioned by the reorganization; that as a result thereof, TCCEC will offer an Early Separation Program wherein a TCCEC employee who has rendered at least 10 years of service on or before March 31, 1994 may apply for availment; and that if his application for availment of the Program is approved by TCCEC which has absolute discretion to approve or disapprove any such application, the employee shall be entitled to a separation package consisting of the following benefits: a) Vested retirement benefits from the retirement plan b) Employee's entitlement to the Company's share in the Provident fund c) Financial assistance equivalent to 75% of final monthly salary for every year of service d) Conversion of accumulated sick leave e) conversion of unused vacation leave, and f) Pro-rated 13th and 14th month pay 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 by such official or employee from the service of the employer a due to dealt, 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 has not requested for such separation as in this case, wherein the separation of the employee 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 require the presence of these two (2) conditions in order that the employee benefit 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 the said official or employee; and (2) the employer pays the benefit to the said official or employee of his heirs as a consequence of such separation. Since the separation of the employees and officers of TCCEC is beyond their control, any and all amount, i.e., items (a). (b), (c), (d) and (e) of separations package, 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 Tax Appeals and Efren P. Castaeda, G.R. No. 96016 prom. October 17, 1991) The Tax exemption does not include the company's payment of salaries and pro-rated 13th and 14th month pay of the concerned officials and employees. (BIR Ruling No. 379-93) Very truly yours, ALICIA P. CLEMENO Officer-in-Charge (Legal Service)