BIR Ruling No. 050-12

February 9, 2012 BIR RULING NO. 050-12 Section 32 (B) (6) (b) NIRC; BIR Ruling No. 009-2011; BIR Ruling No. 199-2011 Siguion Reyna Montecillo & Ongsiako Law Offices 4th & 6th Floors, Citibank Centers 8741 Paseo de Roxas Makati City Attention: Ferdinand M. Hidalgo Gentlemen : This refers to your letter, dated 19 August 2010, requesting on behalf of your client, ABB, Inc. (the "Company"), formerly, Asea Brown Boveri, Inc., for certificate of exemption from income tax and, consequently, from withholding tax, on the monetary benefits of the three (3) employees of the Company who were separated from employment due to the closure of the Company's Process Automation-Metal Service Unit. TcIaHC It is represented that the Company, duly organized and existing under Philippine laws with principal office address at Km. 20 South Superhighway, Sucat, Paraaque City, is primarily engaged in the business of providing power and automation products and technologies to both private and public sectors that include, among others, the National Power Corporation, National Transmission Company, Meralco and San Miguel Corporation; that at the start of the third quarter of the year 2010, the Company closed its Process Automation-Metal Service Unit due to its failure to generate business brought about by competition, market size and the current economic condition; that as a result thereof, three (3) employees, namely, Edgardo Marte, Iris Pete Lim and Ronald Cedre , were affected and subsequently terminated from employment with corresponding separation benefits in accordance with the existing Labor laws. 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. 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, Edgardo Marte, Iris Pete Lim and Ronald Cedre's separation from employment was due to the closure of the Company's Process Automation-Metal Service Unit effected by ABB, Inc. 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. 009-2011, dated January 19, 2011) ADcHES Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to Edgardo Marte, Iris Pete Lim and Ronald Cedre . 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 Edgardo Marte, Iris Pete Lim and Ronald Cedre 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. AICHaS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue