BIR Ruling No. 070-13

February 18, 2013 BIR RULING NO. 070-13 Section 36 (B) (6) (b), NIRC of 1997, as amended; BIR Ruling No. 425-11; BIR Ruling No. 008-11 WPP Marketing Communications, Inc. 7/F Equitable PCI Bank Tower 8751 Paseo de Roxas, Salcedo Village, Makati City Attention: Bernadett J. Sanchez Chief Finance Officer Gentlemen : This refers to your letter dated 9 August 2012 requesting confirmation of your opinion that the separation benefit of its employee, Mr. Reonel Querijero, who will be terminated due to redundancy is exempt from income tax and consequently from the withholding tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. THCSAE It is represented that WPP Marketing Communications, Inc. with Taxpayer's Identification No. 000-346-929, is a domestic corporation engaged in general advertising business including the preparation and arrangement of advertisements and manufacture and construction of advertising devices and novelties; that it is registered with the Securities and Exchange Commission (SEC) under Registration No. 4219; that on July 16, 2012, WPP Marketing Communications, Inc. filed written notice of redundancy to the Department of Labor and Employment for the position of General Manager of Maxus, a division of WPP Marketing Communications, Inc.;that the said notice of redundancy covers one of its employees, Mr. Reonel Querijero; and that the required 30 days notice to Mr. Reonel Querijero was received by the Department of Labor and Employment on July 23, 2012. In support of its request, WPP Marketing Communications, Inc. has completely submitted on October 2, 2012 the following documents: 1. SEC Certified True Copy of the Certificate of Registration; 2. BIR Certificate of Registration; 3. Sworn certification executed by the CEO of Maxus, a division of WPP MARKETING COMMUNICATIONS, INC.,attesting to the fact that the separation from employment of its employee was due to redundancy; and 4. Copy certified by the Department of Labor and Employment (DOLE) of a written notice to the DOLE at least one (1) month before the intended date of separation. 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 the 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 or initiated by him. This Office has had several occasions to rule that the above-mentioned law requires the presence of two (2) conditions in order that the employee's 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. 008-11 dated 19 January 2011) HEIcDT In view thereof, this Office is of the opinion that since it appears that Mr. Reonel Querijero, employee of WPP Marketing Communications, Inc. has been separated from the service of the employer because of redundancy, a cause beyond the control of said employee, any amount to be received by him as a consequence of said separation is exempt from income tax and consequently from the withholding tax prescribed under Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations Nos. 6-2001 and 12-2001. Accordingly, no withholding tax shall be deducted from the separation benefit and the entire amount thereof shall be given to the entitled separated employee. (BIR Ruling No. 425-11 dated 4 November 2011) 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. 425-11 dated 4 November 2011) It is, however, understood that this exemption does not include the payment of the separated employee's salary 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. 425-11 dated 4 November 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue