BIR Ruling [UN-382-95]

October 26, 1995 BIR RULING [UN-382-95] R.S. Bernaldo & Associates Unit 1810 Cityland Condominium 10 Tower I 6815 Ayala Avenue cor. H. V. dela Costa Ext. 1200 Makati City Attention: Atty . Rosario S . Bernaldo General Manager Gentlemen : This refers to your letter dated June 26, 1995 requesting confirmation of your opinion on the taxability of the separation benefits which your client, Siemens, Inc., (SIEMENS), will give to its employees who will be separated as a result of the Company's Involuntary Special Retirement Program (ISRP). It is represented that SIEMENS is a multinational company engaged in the manufacture of telecommunication products; that the Management has unilaterally adopted the ISRP effective June 1, 1995 up to September 30, 1995 to cut costs, improve efficiency and further improve the quality of its products and services to face increased market competition; that the ISRP will result in the involuntary/forced separation from the Company of certain employees occupying positions which have been determined to be redundant; that the said ISRP is a one-time program and does not supersede the existing Company Retirement Policy; that the said employees to be separated will be given a separation pay equivalent to one and one-half (1-1/2) months pay for every year of service based on the employees latest pay rate; that additional three (3) months medical insurance coverage will be provided to the said employees and their dependents presently enrolled in the medical plan after the effectivity of separation; that additional three (3) months life insurance coverage after the effectivity of the separation shall likewise be given; that in addition, the cash equivalent of the accrued vacation and sick leave shall also be given to the said employees as of the effectivity date of the separation; that the partial list of employees who were affected by the said ISRP are the following: 1. Natividad Garcia 2. Ernesto Tanala 3. Alberto Garcia 4. Marlon Magsino 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 of 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 the following 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 said employees, namely: 1. Natividad Garcia 2. Ernesto Tanala 3. Alberto Garcia, and 4. Marlon Magsino under your Involuntary Special Retirement 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, their 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 No. 143-95 dated April 10, 1995). Very truly yours, ALICIA P. CLEMENO Assistant Commissioner Legal Service