BIR Ruling [UN-115-95]

March 22, 1995 BIR RULING [UN-115-95] International Corporate Bank III Paseo de Roxas, Legaspi Village, Makati, Metro-Manila Attention: Mr . Edgardo R . Soriano VP-Human Resources Gentlemen : This refers to your letter dated March 8, 1994 stating that the Union Bank of the Philippines ("Union Bank") and the International Corporate Bank ("InterBank") will merge into one commercial bank early this year, with Union Bank as the surviving entity: that as a consequence of the merger all InterBank employees as of the effectivity of the integration will have to be absorbed by Union Bank; that their absorption will naturally bloat the Union Bank headcount, resulting in certain positions becoming redundant or superfluous; that having identified the positions that will become redundant as a result of the merger, InterBank intends to separate the incumbents of said positions through a special severance program ("program"), which will give redundant employees an opportunity to receive better separation benefits. Based on the foregoing representations, you are requesting confirmation that the separation pay, the vesting benefits under Interbank's retirement plan, and the cash equivalent of unused vacation and sick leave credits that the InterBank will pay to redundant employees under the program, 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 and employee or by 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 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 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 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 InterBank 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, 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) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant Legal Service