BIR Ruling [UN-099-95]

March 9, 1995 BIR RULING [UN-099-95] Itochu Corporation (Manila Branch) 16th Floor, BA-Lepanto Bldg. 8747 Paseo De Roxas Avenue Makati, Metro Manila Attention: Mr . Tadaomi Shimaoka General Manager Gentlemen : This refers to your letter dated February 24, 1995 stating that Itochu Corporation (Company) plans to implement a reorganization plan designed to streamline its operations, right-size its workforce, and optimize its overall efficiency and productivity and thereby maintain its competitiveness; that after its implementation, the plan is expected to eliminate certain positions that have become superfluous or unnecessary as a result of the organizational changes; that after having identified the positions that have become redundant as a result of the reorganization, the company intends to reduce its personnel through a retirement program wherein the affected employees will receive severance benefits equivalent to 200% of his/her basic salary multiplied by the number of years of service with the company at the time of retirement; that conformably with the provisions of the company's Collective Bargaining Agreement on the matter of retrenchment, the separation benefits shall be taken from the Itochu Corporation Manila Branch Employees Retirement Fund. cdtech In connection therewith, you are requesting confirmation of your opinion that the separation benefits are not 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 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 other 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 abovementioned law requires the presence of these two 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 the said official or employee; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. The phrase "for any cause beyond the control of the 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. In other words, the separation must not be of his own making or choice. Since the separation of the employees from the service of the Company is beyond their control, any and all amounts including the terminal leave pay (sick leave and vacation leave credits) which the employees will receive as a result of their separation from the service of the Company, are exempt from income tax and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended. It is, however, understood that the payment of the salary of the employees of the Company, if any, is subject to income tax. (BIR Ruling No. 197-92 dated April 13, 1992) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)