BIR Ruling No. 018-15

January 26, 2015 BIR RULING NO. 018-15 Sec. 32 (B) (6) (b) of the Tax Code of 1997, as amended; BIR Ruling No. 404-13; BIR Ruling No. 386-13; BIR Ruling No. 334-13 NCT Transnational Corporation G/F TDG-NYK Harbor Center Building I, Railroad corner 23rd St., Port Area, Manila Attention: Ms. Melitha F. Gasapos Corporate Secretary Gentlemen : This refers to your letter dated July 26, 2013, requesting in behalf of NCT TRANSNATIONAL CORP. (NCT for brevity) , for the issuance of a Confirmatory Ruling for the tax exemption under Section 32 (B) (6) (b) of the Tax Code of 1997 of the amounts received by NCT employees as a consequence of their separation on account of retrenchment to prevent losses. It is represented that NCT, with Taxpayer's Identification No. (TIN) 000-889-609-000, is a corporation duly organized and existing under the laws of the Republic of the Philippines with principal office address at G/F TDG-NYK Harbor Center Building I, Railroad corner 23rd St., Port Area, Manila, and is primarily engaged in providing services to and for the maritime industry, providing services of integrated and intermodal transport system including but not limited to lighterage, stevedoring, warehousing, and freight forwarding. It is also represented that the trucking business of NCT has been incurring losses and have already downsized its operations last October 2012; that due to continued loss of revenues, the Management decided to concentrate on its core businesses which are Chassis Leasing and Container Yard Operations; that the Management is constrained to close down its Trucking operations which consequently require retrenching all employees involved in said line of business; that all affected employees were notified by NCT Management on May 15, 2013; and that a Notice of Retrenchment was sent to the Department of Labor and Employment (DOLE) which resulted in the Establishment Termination Report duly received by Manila Field Office, DOLE-NCR on May 14, 2013. 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. ADETca Accordingly, this Office hereby holds that any and all amounts to be received by your six (6) employees, namely: 1. Anouevo, Benjie S. 2. Espleguera, Ireneo C. 3. Inyong, Albaro G. 4. Jimenez, Jerwin R. 5. Sevilla, Joseph D. 6. Tomarse, Rito B. who are 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. 404-13 dated November 7, 2013) Moreover, pursuant to Section 2.78.1 (A) (7) of RR 2-98, as amended, commutation and payment of monetized unused vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to the withholding tax. Conversely, the cash equivalent of vacation leave exceeding ten (10) days is subject to tax. However, this same principle cannot apply to sick leave credits since an employee must actually go on sick leave to be able to avail of said leave credits. (BIR Ruling No. 386 dated October 22, 2013) It is, however, understood that this exemption does not include the payment of the separated employees' salaries and the payment of the 13th month pay and other benefits in excess of the Php30,000.00 threshold under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. (BIR Ruling No. 334-13 dated August 30, 2013) Lastly, the separation from the service must be the direct result of actual retrenchment implemented and not due to the employees' qualification to the compulsory/optional retirement program of the company. 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