BIR Ruling No. 027-12

January 16, 2012 BIR RULING NO. 027-12 Section 32 (B) (6) (b); BIR Ruling No. 250-2011 Asian Transmission Corporation Carmelray Industrial Park Canlubang, Calamba City Attention: Atty. Roderick M. Tan VP-Personnel and Legal Gentlemen : This refers to your letter dated May 18, 2011 requesting on behalf of Ma. Cristina V. Fajardo, (TIN 103-324-062) for the grant of tax exemption on her separation benefits pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. Documents submitted show that Ma. Cristina V. Fajardo (MCVF for brevity), 46 years old, is an employee of Asian Transmission Corporation (TIN 000-421-615-000). Based on the Affidavit of Dr. Charity Charisse Viado-Gorospe, the attending Medical Oncologist of MCVF, she was diagnosed to have an Invasive Carcinoma Grade 2 on January 2001 and underwent chemotherapy with FAC for 6 cycles followed by Tomoxifen. Hormonal therapy was taken five (5) years up to 2005 and in 2006, upon repeat of breast ultrasound, solid nodules were found at her left breast. To date, routine follow-up was made, showing normal laboratory results, chest x-ray and ultrasound of the abdomen. But recent ultrasound was done on January 2011 that showed solid nodules at mastectomy site and her left breast. Furthermore, MCVF was advised to have regular monitoring every six (6) months including standard blood tests, x-ray and abdominal imaging studies and breast ultrasound for cancer surveillance. She was also asked to refrain from carrying heavy and strenuous work load and was directed to have adequate rest. TEAICc In reply, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, 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 due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall not be included in the gross income and shall be exempt from taxation under Title II of the Tax Code. (BIR Ruling No. 211-92 dated July 24, 1992) 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. Moreover, Section 1 of Revenue Regulations (RR) No. 10-00 amending Sections 2.78.1 (A) (3), (6) (b) (ii) and (7) of RR No. 2-98, states that "Amounts of 'vacation allowances or sick leave credits' which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which is paid notwithstanding his absence from work constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which are paid to private employees during the year . . . SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX." (emphasis provided) However, this same principle cannot apply to sick leave credits since the employee must actually go on sick leave to be able to avail of said leave credits. In view thereof, this Office is of the opinion, as it hereby holds, that any and all amounts which MCVF will receive as a result of her separation from the service of her employer including the monetized value of vacation leave credits of (10) days or less, due to the aforesaid poor health condition is exempt from income tax and consequently from 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. (BIR Ruling No. 250-2011 dated July 26, 2011) It is, however, understood that the payment of your salary is not exempt from income tax and consequently from withholding tax. 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. HEISca Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue