BIR Ruling No. 020-13

January 21, 2013 BIR RULING NO. 020-13 Section 32 (B) (6) (b) Tax Code; BIR Ruling No. 199-2011 SGS Gulf Limited (Regional Operating Headquarters, Philippines) 20 Flr. Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Marites C. Beltran HR Assistant Manager Gentlemen : This refers to your letters dated April 17, 2012 and July 26, 2012 requesting, on behalf of SGS Gulf Limited (Regional Operating Headquarters, Philippines) ,(the " Company "),tax exemption on the separation benefits paid by the Company to its employees who were separated from employment by reason of the redundancy of their positions. ADSTCI Documents submitted show that the Company, with Tax Identification No. 225-537-223-000, is a regional operating headquarters of SGS Gulf Limited, a foreign corporation organized and existing under the laws of Switzerland, as evidenced by its Certificate of Registration and License issued by Securities and Exchange Commission (SEC) dated July 4, 2003; that the Company's principal place of business is located at 20th Floor, Citibank Tower, Paseo de Roxas, Makati City; that one of the clients of the Company has decided to pre-terminate its service agreement with the latter, resulting to the declaration of the positions of the employees doing the task for the said engagement as redundant; that the appropriate notices of termination have been duly sent to the concerned employees and the Department of Labor and Employment (DOLE),in compliance with the requirements of the law; and that the Company shall grant the affected employees a separation pay equivalent to their one (1) month salary for every year of service. The affected employees, and their corresponding positions, are the following: 1. Fernandez, Glenn Ambrosio Systems Administrator 2. Tugonon, Eric Abellar Systems Administrator 3. Liwanag, Spencer Vinoya Systems Administrator 4. Arambulo, Jeffrey Ceir Meteorological Assistant 5. Gayundato, Lawrence Asis Meteorological Assistant 6. Zulueta, Angelito, Jr. Ancheta Meteorological Assistant 7. Importante, Jezreel Pantulia Meteorological Team Leader 8. Aloba, Norman Rocero Systems Administrator In reply, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, 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 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 nor initiated by him. SCIcTD The above-mentioned provision requires the presence of two (2) conditions in order that the 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. As noted, the employees' separation from employment was due to the redundancy of their respective positions in the Company which is not of their own volition. Accordingly, where the employee is separated involuntarily from the service due to a cause beyond his control, the separation benefits received by him as a result thereof are exempt from income tax and consequently from the withholding tax prescribed by Section 79 of the Tax Code of 1997 and as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling No. 199-2011 dated June 29, 2011) Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the separated employees. Moreover, pursuant to Section 2.78.1 (A) (7) of RR 2-98, as amended, the terminal pay, i.e. ,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. It is, however, understood that this exemption does not include the payment to the employees of their salaries and the payment of the 13th month pay and other benefits in excess of the Php30,000 threshold under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. (BIR Ruling No. 199-2011 dated June 29, 2011) 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. EaISDC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue