Cochingyan & Peralta

November 16, 2007 BIR RULING [DA-595-07] Cochingyan & Peralta Twelfth Floor, 139 Corporate Center 139 Valero Street, Salcedo Village Makati City Attention: Atty. Jose Cochingyan III Gentlemen : This refers to your letter dated February 23, 2007 stating that your client, AVIVA GENERAL INSURANCE PTE. LTD. (AVIVA), is a limited private company organized and existing under the laws of Singapore with a Philippine branch duly registered and licensed to transact non-life insurance business in the Philippines by the Securities and Exchange Commission (SEC) under SEC Registration no. FS200515139; that it is engaged in general insurance covering property, personal accident, marine cargo, healthcare, motor liability, engineering, bonds, home contents, personal effects and other classes of casualty business, to meet the needs of businesses as well as individuals; AVIVA is wholly owned by Mitsui Sumitomo Insurance Co., Ltd., a Japanese corporation engaged globally in non-life and life insurance businesses, financial services and risk-related services; that the formation of AVIVA was a result of the purchase by Mitsui Sumitomo Insurance Co., Ltd. of the entire Asian general insurance business from a British group of insurance companies, CGU International Insurance Plc., (CGU) a British registered corporation, is one of the companies in this group of insurance companies; that among the businesses included in the purchase was the general insurance business of the Philippine branch of CGU; that for the purpose of taking over this Philippine general insurance business, the Philippine branch of AVIVA was registered with the SEC on September 21, 2005 and the transfer of the Philippine general insurance business of CGU to AVIVA was completed on November 30, 2005; that in addition, the employees of CGU were absorbed by AVIVA under the same employment terms and conditions; that the aforesaid employees, who tendered their respective resignation letters to CGU, were not paid any separation pay in view of their transfer to AVIVA which was without loss of tenure; that the years or period of the aforesaid employees' service with CGU were carried over to and recognized by AVIVA for purposes of determining their tenure; that it was as if there was no interruption in their employment; that Mitsui Sumitomo Insurance Co., Ltd. also owns 48.49% of the shares in BPI/MS Insurance Corporation (BPI/MS), a domestic non-life insurance corporation in the Philippines; that BPI/MS likewise engages in the same line of general insurance business as AVIVA in the Philippines and has, in fact, a larger insurance portfolio and organizational infrastructure, being the third largest insurance corporation in the Philippines in terms of gross premiums written; that due to the duplication of the general insurance operations in the Philippines from the perspective of Mitsui Sumitomo Insurance Co., Ltd. and a corresponding need to rationalize its non-life insurance interests in the Philippines, a decision was made to merge the insurance portfolio of AVIVA's Philippine branch with BPI/MS; that AVIVA entered into an Asset Purchase Agreement (APA) on August 1, 2006 with BPI/MS for the integration of AVIVA's Philippine general insurance portfolio with that of BPI/MS, wherein AVIVA sold its insurance portfolio and related assets to BPI/MS; that as a direct consequence of the sale, there was a cessation of AVIVA's operations and the employees of AVIVA were terminated with effect on September 30, 2006. Background of the Provident Fund That on April 3, 2001, CGU established the CGU International Insurance plc Provident Fund (CGU Provident Fund), which qualified as a reasonable private benefit plan within the contemplation of Section 32 (B) (6) (a) of the Tax Code of 1997 pursuant to BIR Ruling No. ERP-284-2001 dated December 5, 2001; that as a result of the purchase by Mitsui Sumitomo Co., Ltd. of the non-life insurance business in the Philippines of CGU on January 18, 2006, CGU and AVIVA executed a Provident Fund Transfer Agreement dated December 2, 2005, whereby CGU assigned in favor of AVIVA all of its rights, title and interest in the CGU Provident Fund; that on January 18, 2006, AVIVA requested the BIR for a confirmation that the tax exemption and qualification of the CGU Provident Fund are not affected by the Provident Fund Trust Agreement between CGU and AVIVA; that said request was confirmed by the BIR in BIR Ruling No. DA584-06 dated September 27, 2006; that the CGU provident Fund, which was renamed as Aviva General Insurance Pte. Ltd. Provident Fund (Provident Fund) as per Board Resolution No. 2006-1108-01, is funded by contributions from both the employees (members) and the employer (company); that the contribution of the members, which is 5% of the members' gross salary, are credited to the Members' "A" Account while the company's contributions, which is 10% of the members' gross annual salary, are credited to the Members' "B" Account of the Provident Fund; that under the rules of the Provident Fund, a member-employee retiring or resigning from the company shall be entitled to the aggregate of: (1) 100% of the member's Member "A" Account balance and (2) percentage of the member's Member "B: Account balance determined based on a scale prescribed under the rules. CTHDcS Separation Benefits of the Employees of AVIVA The separation package given to the terminated employees of AVIVA consists of the following: 1. Separation pay equivalent to one (1) month salary for every year of service based on the combined tenure with both CGU and AVIVA; 2. Employee's Provident Fund Contributions designated as Members' "B" Account in the Provident Fund until September 30, 2006; 3. 100% of Employer's Contributions designated as Members' "B" Account in the Provident Fund up to September 30, 2006; 4. Wages due to the employee on effective date of termination; 5. 13th month pay pro rated on effective date of termination; 6. Unused earned vacation leave; 7. Pro rata payment of incentive scheme where applicable; and 8. Less any loans or liabilities outstanding with the company. Based on the foregoing representations, you now request for confirmation of your opinion that 1. The termination of the employees of AVIVA due to the sale of its insurance portfolio and related assets to BPI/MS Insurance Corporation (BPI/MS) partakes of an involuntary separation or cause beyond the control of the employees; 2. The above-mentioned separation package given to the employees of AVIVA are exempt from income tax and consequently from withholding tax on wages pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. In reply thereto, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended, and implemented by Revenue Regulations No. 2-98, as amended, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of 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 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 official or employee must not be asked for or initiated by him. The above-mentioned law requires the presence of these two (2) 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 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 and termination of the employees of AVIVA is beyond their control, any and all amounts that they will receive as a result thereof, is exempt from income tax and consequently from withholding tax prescribed in Section 79, Chapter XIII, Title II of the Tax Code of 1997, as amended, and implemented by Revenue Regulations No. 2-98, as amended. TSEAaD SUCH BEING THE CASE, this Office hereby confirms your opinion that 1. The termination of the employees of AVIVA due to the sale of its insurance portfolio and related assets to BPI/MS Insurance Corporation (BPI/MS) partakes an involuntary separation or cause beyond the control of the said employees; and 2. The separation package given to the employees of AVIVA are exempt from income tax and consequently from withholding tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service