BIR Ruling No. 045-12

February 9, 2012 BIR RULING NO. 045-12 32 (B) (6) (b) National Internal Revenue Code of 1997, as amended; and Section 1 of Revenue Regulations No. 10-00 amending Section 2.78.1 (A) (3), (6) (b) (ii) and (7) of Revenue Regulations No. 2-98 Aveena, Inc. 1610 A. Rodriguez Avenue, Dela Paz, Pasig City Attention: Ma. Cecilia G. Cruz Gentlemen : This refers to your letter dated 19 April 2011 wherein it is represented that AVEENA, INC. is a corporation duly organized and existing under the laws of the Republic of the Philippines; that AVEENA, Inc. maintains a BIR approved Retirement Plan with its Trustee, Rizal Commercial Banking Corporation, through its Trust and Investments Division as per letters dated June 20, 2006; that said Retirement Plan provides for retirement, death, disability and severance benefits for all eligible employees of the Corporation; that Ms. Elvira G. Recalde is an employee of AVEENA, INC. with a position of Sales Staff, that on February 18, 2011, Ms. Recalde was examined by AVEENA, INC. physician and found to be suffering from poor vision due to "High Myopia","Ocular Albinism Changes, bilateral" "Refractory Esotropia" and Refractory Amblyopia";that the condition of Ms. Recalde was found to be irreversible and incompatible with the requirements of her post; that on March 2, 2011, AVEENA, INC.'s Retirement Committee approved to grant Ms. Recalde disabling illness benefit payment. In connection with the foregoing, you are requesting for a ruling that the disabling illness benefits to be paid by the Corporation to Ms. Recalde is exempt from income tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. 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. 039-10 dated August 27, 2010). 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. With regard to vacation allowance or sick leave credits, Section 1 of Revenue Regulations No. 10-00 amending Section 2.78.1 (A) (3), (6) (b) (ii) and (7) of Revenue Regulations No. 2-98 provides that "Amount of 'vacation allowance 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" (underscoring provided).However, this same principle cannot apply to such leave credits since the employee must actually go on such leave to be able to avail of said leave credits. aDcHIS In view thereof, this Office is of the opinion, as it hereby holds, that any and all amounts which Ms. Recalde will receive as a result of her separation from the service of her employer including the monetized value of unutilized vacation leave credits of ten (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. It is, however, understood that the payment of Ms. Recalde's 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 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 of Internal Revenue