BIR Ruling No. 037-15

February 6, 2015 BIR RULING NO. 037-15 Section 32 (B) (6) (b), 1997 NIRC; BIR Ruling No. 416-2012 Alaska Milk Corporation 6/F Corinthian Plaza 121 Paseo de Roxas Makati City Attention: Mr. Wilfred Steven Uytengsu President and CEO Gentlemen : This refers to your letter dated August 22, 2014 requesting for confirmation that the separation benefits to be given to its employees due to redundancy are exempt from income tax and consequently from withholding tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. It is represented that Alaska Milk Corporation (Alaska for brevity) is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines with principal place of business located at 6th Floor Corinthian Plaza, 121 Paseo de Roxas, Makati City. It is duly registered with the Securities and Exchange Commission (SEC) under Registration No. ASO 94-008745 to engage in the manufacture and sale of milk and other dairy products and was issued Taxpayer's Identification No. 003-945-022 by the Bureau of Internal Revenue (BIR). In March 2012, Royal FrieslandCampina N.V. (RFC), a company incorporated in Netherlands, through its indirect subsidiary, FrieslandCampina Investments Holding Company Philippines, Inc. (FC Philippines), a domestic corporation, increased its shareholdings in the company from 8.1% to 68.9% through the purchase of shares from the controlling shareholders of Alaska. In compliance with regulatory requirements, RFC, through FC Philippines, launched a tender offer for the remaining outstanding publicly traded shares. The tender offer resulted in RFC' total ownership in Alaska of 99.7%. In conformity with the blueprint organization of RFC for all its operating companies in Asia, the management of Alaska approved the streamlining of its operation which resulted to the reorganization/restructuring of the two of its departments, as follows: a) The Corporate Affairs Department headed by the Vice-President for Corporate Affairs, Atty. Santiago A. Polido will be abolished. In lieu thereof, two new departments will be created to take over its functions, the Human Resources Department and Public and Regulatory Affairs Department, which will be separately headed by a director or manager with a lower job grade and salary level than a Vice-President; and, b) The office of the Chief Financial Officer (CFO) held by the Executive Vice-President, Mr. Joselito J. Sarmiento, Jr. will be abolished. As a consequence, the supervision of the Procurement Department and the Information Systems Department currently under the responsibility of the CFO will be transferred to the Director of Procurement, CPA Regional Office in Singapore, and Director of the Corporate ICT in Netherlands, respectively. In lieu thereof, a new finance department with a reduced scope of responsibility, which will be headed by a new director or manager with a lower job grade and salary level than an Executive Vice-President, will take over the remaining function of the old finance department. The implementation of the foregoing reorganization/restructuring of Alaska will result in the redundancy of the positions currently held by the employees. As a consequence, the employment of the concerned employees of Alaska will be terminated effective March 30, 2015. Due to the involuntary separation of the employees, Alaska will grant and pay a separation benefit equivalent to two (2) months of the latest salary of each employee for every year of service rendered to the company in addition to the other accrued benefits. HCITcA 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 same Tax Code. (BIR Ruling No. 416-2012 dated June 25, 2012) The above-mentioned 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. Documents submitted show that Alaska has already submitted an Establishment Termination Report with the Department of Labor and Employment-National Capital Region (DOLE-NCR) on July 11, 2014 with information that Santiago A. Polido and Joselito J. Sarmiento, Jr. have been terminated effective March 30, 2015 due to redundancy and that they have been duly notified of their termination. Accordingly, the separation pay to be received by the retrenched employees, Atty. Santiago A. Polido and Mr. Joselito J. Sarmiento, Jr. as a result of their separation from the service is exempt from income tax and consequently from the withholding tax prescribed by Section 79 of the 1997 Tax Code, as implemented by Revenue Regulations (RR) No. 2-98, as amended by RR Nos. 6-2001 and 12-2001. 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 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 Nos. 479-2014 dated December 3, 2014 and 416-2012 dated June 25, 2012) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue