BIR Ruling No. 094-12

February 16, 2012 BIR RULING NO. 094-12 Sections 32 (B) (6) (b) & 34 (A) (1) (a) (i) 1997 Tax Code, as amended; BIR Ruling No. 199-2011 Aboitiz Jebsen Company, Inc. 2nd Flr.,Harbor Center II Bldg. Railroad & Delgado Sts.,South Harbor Port Area, Manila Attention: Arleen Bernadette V. Asuncion Vice-President-Crewing Gentlemen : This refers to your letter, September 23, 2011, requesting on behalf of Aboitiz Jebsen Company, Inc. (formerly, Aboitiz Jebsen Bulk Transport Corp.),(the "Company"),for confirmation of your opinion that the separation benefits that would be given to your employees on account of their separation from employment due to the redundancy of their respective functions/positions in the Company are exempt from the income tax and, consequently, from the withholding tax. It is represented that the Company, a domestic corporation duly registered with the Securities and Exchange Commission (SEC),is primarily engaged in the business of providing ship technical services and supplying shipboard personnel; and that on January 31, 2003, it entered into a Manning Agreement with Aboitiz Transport Systems Corp. ("ATSC"),by which the Company shall provide ATSC with ship management and technical services for the latter's thirteen (13) vessels. It is further represented that on July 15, 2011, the Company received a Notice of Termination from ATSC, terminating the January 31, 2003 Manning Agreement; that the Company's evaluation of its operations vis--vis its existing manpower complement revealed that several existing functions/positions in the Company are no longer necessary and may be abolished without affecting the Company's operational efficiency; that the appropriate notices of termination of employment were properly served with the concerned employees and the Department of Labor and Employment (DOLE); and that the affected employees would be given separation benefits in accordance with the applicable provisions of the Labor Code and other social legislation. The affected employees, and their corresponding positions, are the following: 1. Rafael G. Amador - Purchaser 2. Francisco Paquito G. Avenido - Senior Superintendent 3. Henrik T. Baes - Quality Assurance Manager 4. Leocircolo L. Codilla - Superintendent 5. Aristotle B. Del Mundo - Superintendent 6. Leandro A. Doloroso - Electrical Superintendent 7. Erden G. Ferrer - Senior QA & Corp. Security Manager 8. Annalyn D. Geronimo - Accounting Assistant 9. Pricillo T. Gomez - Accounting Manager-SM Accounts 10. Adrian T. Israel - Junior Electrical Superintendent 11. Jaime M. Macawile - Training Manager 12. Ariel H. Mayuga - Superintendent 13. Ronald P. Perea - Safety Officer 14. Daryll C. Quilat - Superintendent 15. Eriberto B. Robles - Superintendent 16. Venrose V. Valenzuela - TQA Manager 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, the employees' separation from employment was due to the redundancy of their respective positions in the Company which is not of their own volition. 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. 199-2011 dated June 29, 2011) Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the separated employees. 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 the employees 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) Finally, the expenses incurred by the Company in providing the said benefits are deductible from its gross income for being an ordinary and necessary trade or business expense pursuant to Section 34 (A) (1) (a) (i) of the Tax Code of 1997. This ruling shall continue to be valid unless revoked by this Office for violation of any provisions of Revenue Memorandum Order (RMO) No. 26-2011 and other applicable rules and regulations of the BIR, and the terms and conditions herein set forth. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue