Mateo vs. Coca-Cola Bottlers Phils. Inc.

A benefit paid because of an employee’s involuntary separation due to redundancy remains separation pay, even if computed using a retirement plan’s formula, and is exempt from income tax under Section 32(B)(6)(b) of the NIRC as an amount received for a cause beyond the employee’s control; it does not become a taxable retirement benefit.

Mateo was covered by Coca-Cola Bottlers Phils. Inc.’s BIR-approved Retirement Plan. Article 283 of the Labor Code fixes separation pay for redundancy, while Section 32(B)(6) of the NIRC exempts from gross income amounts received as a consequence of separation for any cause beyond the employee’s control.

Mateo was previously employed by Philippine Beverage Partners, Inc. (PhilBev) as Sales Supervisor. In 2007, PhilBev ceased operations, and, as a result, Mateo was separated from service; she received the corresponding separation benefits from PhilBev. Thereafter, Coca-Cola Bottlers Phils. Inc. hired her, also as Sales Supervisor, and eventually promoted her as District Team Leader.

Mateo was a member of Coca-Cola’s Retirement Plan duly approved by the BIR. The Plan provided that a member involuntarily separated from service for any cause beyond the member’s control shall receive, in lieu of any other retirement benefits, a separation benefit computed in accordance with the retirement formula or the termination benefit mandated by law, whichever is higher; it also provided that company liabilities shall be deducted from the benefit and that no other benefits shall be payable under the Plan.

In February 2012, Coca-Cola informed Mateo that it was enhancing its Route to Market (RTM) strategy to improve sales force effectiveness and that, because the RTM strategy required different sales force competencies and capabilities, her position was considered redundant. She was also informed that her employment would be terminated effective March 31, 2012, and that she was to receive an amount tentatively computed at P676,657.15 as a consequence of her separation from service.

On April 21, 2012, Coca-Cola released to Mateo two checks for the total amount of P402,571.85. Upon verification, Mateo discovered that her outstanding loan balance and the amount of P134,064.95, representing withholding tax, were deducted from the originally computed amount. Mateo sought clarification as regards the deductions and was informed that the retirement benefit she received was no longer tax exempt because she had previously availed of such tax exemption upon her separation from PhilBev.

Mateo wrote a letter to the Bureau of Internal Revenue (BIR) as regards the propriety of the tax withheld. The Regional Director briefly quoted Section 32(B)(6)(b) of the National Internal Revenue Code (NIRC) of 1997, as amended, and referred the query to the Revenue District Officer for appropriate action. Mateo also referred to a BIR Ruling concerning Coca-Cola’s former employee who was similarly terminated due to redundancy, to the effect that separation benefits received as a result of redundancy are exempt from income tax and, consequently, from withholding tax.

Coca-Cola denied Mateo’s claim for reimbursement of the deducted amount representing tax withheld. This prompted Mateo to lodge her complaint before the Labor Arbiter. The CA found that Mateo had been in Coca-Cola’s employ for less than five years and had already availed of the tax exemption upon her separation from PhilBev.

• Nature of Benefit / Tax Exemption: Petitioner argued that the amount she received from respondent was her separation pay, not her retirement pay, because it was received as a consequence of the termination of her employment due to redundancy; as separation pay, it should not have been subjected to income tax.

• Illegal Deduction / Withholding Tax: Whether respondent is liable for illegal deduction when it withheld tax from the amount received by petitioner as a consequence of her involuntary separation from service.

• Illegal Deduction / Withholding Tax: Yes. The amount was separation pay due to redundancy, not retirement pay, and is exempt from income tax under Section 32(B)(6)(b) of the NIRC; the withholding was therefore an illegal deduction.

• Illegal Deduction / Withholding Tax: The SC started from the undisputed fact that Mateo was separated due to redundancy under Article 283 of the Labor Code, which entitles a redundant employee to separation pay of at least one month pay or one month pay for every year of service, whichever is higher. It then examined Coca-Cola’s BIR-approved Retirement Plan, whose Article V, Section 3 provides that an involuntarily separated member shall receive, in lieu of any other retirement benefits, a separation benefit computed under the retirement benefit formula or the applicable statutory termination benefit, whichever is greater. The SC held that Mateo’s benefit was an involuntary separation benefit, not a retirement benefit, because she was separated due to redundancy and had not reached optional or compulsory retirement age; the use of the retirement formula did not convert its character, since the formula was used because it was more advantageous. There was no showing that Mateo voluntarily opted to retire. Because the benefit was separation pay, the CA erred in applying the retirement-benefit tax exemption conditions under Section 32(B)(6)(a) of the NIRC. Instead, Section 32(B)(6)(b) exempts from gross income any amount received as a consequence of separation because of death, sickness, physical disability, or any cause beyond the employee’s control; redundancy is such a cause. The withholding of P134,064.95 was therefore illegal, and the NLRC decision was reinstated.

• Character of separation benefit is determined by cause of separation, not computation formula — A benefit paid because of involuntary separation due to redundancy remains separation pay even if computed using a retirement plan’s formula; it does not become retirement pay. The SC applied this to Mateo, who was separated due to redundancy and had not retired, so her benefit was separation pay.
• Tax exemption for separation benefits under Section 32(B)(6)(b), NIRC — Any amount received by an employee from the employer as a consequence of separation because of death, sickness, physical disability, or any cause beyond the employee’s control is excluded from gross income and exempt from taxation. Redundancy is a cause beyond the employee’s control; thus the amount was exempt and withholding was illegal.
• Involuntary separation benefit under a BIR-approved retirement plan — Where the plan provides that an involuntarily separated member shall receive, in lieu of other retirement benefits, a separation benefit computed under the retirement formula or the statutory termination benefit, whichever is higher, the employee is entitled to the higher amount. The SC applied this to hold that Mateo’s benefit was an involuntary separation benefit under Article V, Section 3 of the Plan.
• Retirement benefit tax exemption conditions are inapplicable to separation pay — The conditions for tax exemption of retirement benefits under Section 32(B)(6)(a) of the NIRC, including the 10-year service requirement and no prior availment, apply only to retirement benefits. They do not apply to separation pay due to redundancy. The SC held the CA erred in applying them.

• “The fact that petitioner's separation pay was computed in accordance with the formula for computing retirement pay does not thereby convert the character of the benefit received into a retirement benefit.” — The SC rejects the CA’s treatment of the benefit as retirement pay merely because the retirement formula was used.
• “Since the amount received by petitioner was separation pay, such is exempt from income tax under Section 32(B)(6)(b) of the NIRC which provides:” — The SC applies the separation-pay tax exemption to the amount withheld by Coca-Cola.
• “Plainly, petitioner has the right to demand to be paid the separation benefit as computed under the Plan or separation pay in accordance with Article 283 of the Labor Code, and shall be entitled to receive the higher amount.” — The SC explains the employee’s entitlement under the BIR-approved Retirement Plan.
• “Not being a retirement pay, it was likewise plain error on the part of the CA to have applied the four conditions under Section 32(B)(6)(a) of the NIRC for tax exemption of retirement benefits.” — The SC holds that the retirement-benefit exemption conditions do not apply to Mateo’s separation pay.

• Article 283, Labor Code — The employer may terminate employment due to redundancy, and the redundant worker is entitled to separation pay equivalent to at least one month pay or at least one month pay for every year of service, whichever is higher. The SC applied this because Mateo was separated due to redundancy.
• Section 32(B)(6)(b), National Internal Revenue Code of 1997, as amended — Excludes from gross income any amount received by an employee from the employer as a consequence of separation because of death, sickness, physical disability, or any cause beyond the employee’s control. The SC applied this to hold Mateo’s separation pay exempt from income tax and withholding.
• Section 32(B)(6)(a), National Internal Revenue Code of 1997, as amended — The CA applied the retirement-benefit tax exemption conditions, including at least 10 years of service and no prior availment. The SC held it was plain error to apply them because Mateo’s benefit was separation pay, not retirement pay.