BIR Ruling No. 009-11

January 19, 2011 BIR RULING NO. 009-11 Sec. 32 (B) (6) (b), Tax Code; BIR Ruling No. 035-93; BIR Ruling No. DA-078-00 Li & Fung (Philippines), Inc. Valderrama Bldg., 107 Esteban St. Legaspi Village, Makati City Attention: Mr. Eliseo C. Miranda Vice President/Branch Manager Gentlemen : This refers to your letter dated May 9, 2007 requesting for confirmation of your opinion that separation benefits of your employee affected by the company's retrenchment program are exempt from income tax and consequently from the withholding tax. As represented, due to a serious slump in demand in the world market, production of hard goods items/products in one of your divisions will be pulled out. This situation will mean that no order will be placed in that division anymore. Thus, there is an expected decrease in the volume of business of one of your Hardgoods Division and the employment of one of your merchandisers, MS. LORNA DOONE C. CREENCIA will be affected. Your Company filed with the Department of Labor and Employment (DOLE) written notice of termination by reason of retrenchment of the employee concerned. In reply, please be informed that 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 pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. 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. The law requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, 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 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. DSETcC Accordingly, this Office hereby holds that any and all amounts to be received by your employee affected by the retrenchment program are exempt from income tax and consequently from the withholding tax prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. The payment of salaries, however, is subject to income tax and consequently to withholding tax (BIR Ruling No. DA-078-2000 dated February 2, 2000). 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 as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue