BIR Ruling [UN-143-95]

April 10, 1995 BIR RULING [UN-143-95] AVON Products Mfg., Inc. 4/F Fortune Bldg. 160 Legaspi St. Legaspi Village Makati, Metro Manila Attention: Mr . Angelo D . Bernaldo Corporate Planning/Finance Director Gentlemen : This refers to your letter dated January 30, 1995 requesting for our opinion on the taxability of the separation benefits which your Company will give to your employees who were separated as a result of the Company's Special Redundancy Program (SRP). It is represented that Avon Products Mfg., Inc. (AVON) is a multinational company engaged in the manufacture of cosmetic products; that its Operations and Materials Division has adopted an SRP effective January 1, 1995 to improve its organization effectiveness and the quality of its products and services which will result in the forced separation from the company of certain employees occupying positions which have been determined to be redundant; that the said employees to be separated will be given a separation pay equivalent to two (2) months pay for every year of service based on the employees latest pay rate; that the said separation pay is divided into two components, namely: (1) the normal retirement benefits under the existing retirement plan duly registered with the BIR; and (2) an ex-gratia (severance) pay for the balance; that in addition, the cash equivalent of the unused vacation leave and sick leave benefits of the separated employees will be paid to them; that in an affidavit executed by Ms. Violeta Carivic J. Co, AVON's Plant Human Resources Manager, it is stated that as a result of the said SRP, seventeen (17) management employees were declared redundant and were separated from the company last January 2, 1995, namely: 1. Edny G. Cruz, Manager 2. Teresita V. Keil, QA Manager 3. Irma S. Dionido, QA Supervisor 4. Lily F. Pangyarihan, QA Supervisor 5. Zosimo G. Adriano, Materials Handling Supervisor 6. Victoria V. Dano, QA Laboratory Analyst 7. Gloria T. Reyes, QA Laboratory Analyst 8. Irenea D. Cruz, Distribution Analyst 9. Ireneo E. Dagdag, Buyer 10. Juana N. Manapat, Production Supervisor 11. Sonia S. Navarro, Production Supervisor 12. Erlinda M. Nisperos, Distribution Analyst 13. Florencio F. Enriquez, Distribution Analyst 14. Carlos C. Genson, Materials Handling Supervisor 15. Gabriel C. Laparan, Maintenance Supervisor 16. Jocelyn G. Tobias, Administrative Manager 17. Danilo A. Aurelio, Engineering Manager 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 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 said 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's benefits may be granted tax exemptions, namely: (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 Redundancy 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 a part of the tax-exempt separation pay is also exempt from tax (CIR vs. CA and Efren Castaeda, G.R. 96016, October 17, 1991). It is, however, understood that the concerned employees salaries are subject to income tax. (BIR Ruling 197-92 dated April 13, 1992) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner Legal Service By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant Legal Service