BIR Ruling No. 057-14

February 13, 2014 BIR RULING NO. 057-14 Section 32 (B) (6) (b) of the Tax Code, as amended; BIR Ruling No. 416-12 Nonato & Nonato Law Offices Room 405, 4th Floor, Tulips Center A.S. Fortuna St., Bakilid, Mandaue City Attention: Atty. Rester John L. Nonato Gentlemen : This refers to your letter dated May 31, 2013, via 1st indorsement of Revenue Region No. 13-Cebu City requesting in behalf of Customer Benefit Svcs, Inc., for confirmation of opinion that the separation benefits and other benefits of your retrenched employees is exempt from income tax and consequently from withholding tax. Documents submitted disclosed that Customer Benefit Svcs, Inc. with (TIN 401-269-745-000) is a domestic corporation primarily engaged in the business of operating a call center enterprise, providing teleservices for foreign companies (inbound or outbound), such as customer care, help desk, telesales, ad collections with live agents or automated response; that on May 14, 2013, Customer Benefit Svcs, Inc. announced to its six (6) affected workers 1 that it will be implementing a retrenchment program due to redundancy and the need to streamline its operations; that on May 15, 2013, Customer Benefit Svcs, Inc. notified Department of Labor and Employment-Cebu City of the intention of terminating the affected employees; and that its Notices of Termination due to Redundancy to the affected employees are duly received by them. 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 Code. (BIR Ruling No. 416-2012 dated June 25, 2012) cDIHES 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. (BIR Ruling No. 416-2012 dated June 25, 2012) Accordingly, the separation pay to be received by the retrenched employees as a result of their separation from the service is exempt from income tax and consequently from the 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. 416-2012 dated June 25, 2012) 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. (BIR Ruling No. 416-2012 dated June 25, 2012) It is, however, understood that this exemption does not include the payment of the separated employee's 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 No. 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 disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue ANNEX List of Employees Dismissed Due to Redundancy Middle Separation Last Name First Name Name Position TIN # Date Hired Date Medallo Jayson Noynay Network Support 266-307-110-000 28-Apr-11 15-Jun-13 Guino Aldin Argomedo Network Support 226-267-251-000 16-May-11 15-Jun-13 Abear Reymar Plariza Network Support 412-682-454-000 4-Jul-11 15-Jun-13 Dinoy Carlo Mercadal BPO Tech Specialist 274-049-797-000 5-Dec-11 15-Jun-13 Inoc Jr. Melecio Amagos Quality Control Staff 313-356-871-000 28-Jan-13 15-Jun-13 Secretaria Cristal Jane Refuela Quality Control Staff 313-334-389-000 28-Jan-13 15-Jun-13 Footnotes 1. See Annex.