Divina Law

April 1, 2016 BIR RULING NO. 099-16 Section 32 (B) (6) (b), NIRC of 1997, as amended; BIR Ruling No. 199-2011; BIR Ruling No. 084-2010; BIR Ruling No. 131-2010; BIR Ruling No. 021-2010 Divina Law 8th Floor, Pacific Star Building, Sen. Gil Puyat Avenue corner Makati Avenue, Makati City Attention: Nilo T. Divina Sherry Lou R. Bernabe Attorneys-at-Law Gentlemen : This refers to your letter dated September 10, 2015, requesting tax exemption of the separation pay to be received by the employees of MegaLink, Inc. due to redundancy pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. It is represented that MegaLink with BIR Tax Identification No. 047-000-116-836, is a domestic corporation duly organized, registered and existing under and by virtue of the laws of the Republic of the Philippines with Securities and Exchange Commission (SEC) Company Registration No. 170924 and with principal office address at 4th Floor, OneE-Com Center building, Palm Cost Avenue, Mall of Asia Complex, Pasay City; that it is engaged in the business of owning, providing, installing, operating and managing enhancements of services to banks, non-bank financial institutions, corporations, associations, and/or switch networks; that recently, the Bangko Sentral ng Pilipinas (BSP) has ordered the functional consolidation of the country's largest Automated Teller Machine (ATM) Networks, namely, MegaLink and BancNet with the end of establishing a national retail-payment system that will achieve interoperability, efficiency, security and inclusiveness in the way financial transactions are settled; that pursuant to the said directive of the BSP, sometime in January, 2015. MegaLink and BancNet executed a Memorandum of Agreement to effectively integrate the functions and services of both networks; that it was likewise agreed that BancNet shall solely take charge of all ATM services and operations in the country; that, as a result thereof, all member banks and participants of MegaLink are required to migrate and/or transfer to BancNet, thereby effectively rendering MegaLink with no operation; that as a consequence, MegaLink is constrained to redundate all its employees effective 31 December 2015, namely: No. Employee Address Position 1 Acabado, Luz T. B44, L2, Phase 3 ACM Executive Assistant Woodstock Homes, Alapan, Imus, Cavite 2 Aligan, Freeman C. 8th Floor, Unit 1, Glenhaven Project Manager Tower 1, California Garden Square, Libertad corner Calbayog Streets, Brgy. Highway Hills, Mandaluyong City 3 Ang, Jimmy S. 143 Brentwood Heights, Head-Relationship Jerusalem Extension, & Risk Management Multinational Village, Department Paraaque City 4 Aotriz, Jarette B. 6226 San Benissa Garden Relationship Officer Villas, Brgy. Kaligayahan, Fairview, Quezon City 5 Aranas, Andel 1365-A Lardizabal St., Data Center OIC Vincent T. Sampaloc, Manila 6 Babasa, Ma. B13, L11, Garden Drive St., Operations Support Antoniette G. Phase 6, ACM Woodstock Specialist Homes, Alapan 1-A, Imus, Cavite 7 Balicat, Ellaine U. 27 Yakal Street, Malibay, Data Center Pasay City Specialist 8 Bautista, Dean 27 E. Silicon Road, Pilar Data Center Mark C. Village, Las Pias City Specialist 9 Brusola, Ma. 359 3rd Street, Pildera II, Data Center Yzabelle T. NAIA, Pasay City Specialist 10 Castillo, Benjamin P. 38 Winchester Street, President & CEO Hillsborough Subdivision, Brgy. Cupang, Alabang, Muntinlupa City 11 Co, Melvin P. 318-A P. Guevarra St., San Applications Juan City Support Analyst 12 Dela Cruz, Garry U. B3, L17, Purplewreath Street, Senior Manager, Greenwood Heights, Brgy. Systems & Network Paliparan I, Dasmarias, Support Cavite 13 Delos Santos, 140 San Juan, Noveleta, Systems Adolfo Jr. V. Cavite Administrator 14 Esmajer, Edmar A. Room # AG17, 1933 Rizal Applications Avenue, Sta. Cruz, Manila Support Manager 15 Filio, Maria 112 Manzanilla Street, San Quality Assurance Cynthia C. Jose Village 2, Bian, Laguna Officer 16 Guiriba, Cinderella L. 1801 B4 Interio 60, Brgy. Sta. Data Center Maria, Pedro Gil Street, Paco, Specialist Manila 17 Laureta, Leander S. 109 18th Ave., Cubao, Quezon Head-Product City Management Department 18 Mabiasan, Benneth G. 29C Reagan St., Phase 4, Finance & Parkwood Executive Greens, Accounting F. Legaspi St., MAybunga, Manager Pasig City 19 Maravilla, Jose III G. 1107A Almanza, Metropolis Head-Systems Condominium, Las Pias City Infrastructure and Applications Support Department 20 Molines, Frame & Cover Corp., Manila Data Center Christopher L. East Road, Brgy. San Juan, Specialist Taytay, Rizal 21 Montuya, Yvette D. 41 E. Cojuangco St., BF Systems Resort Village, Las Pias City Analyst/Programmer 22 Quimson, Michael M. 2 Adam St., Don Antonio Head-Information Royale Estate, Commonwealth Technology and Avenue, Quezon City Operations Group 23 Ramos, Bernadette A. Marigold 218, Cedar Crest, Head-Planning and Acacia Estates, Taguig City Products Group 1637 24 Ridad, Ristian D. 2873-C Pilar Street, Tondo, Data Center Manila Specialist 25 Rodriguez, Joseph V. 838 A. Decastro St., Malinta, Senior Network Valenzuela City Support Administrator 26 Rosales, Erickson P. 1446 Sto. Sepulcro St., Paco, Head-Product Manila Development and Implementation Department 27 Sabando, Leny B. 1811 San Pedro St., Nakpil, Data Center Malate, Manila Specialist 28 Salapate, Larcy O. 5247B Van Buren St., Pio Del Administrative Pilar, Makati City Manager 29 Simpliciano, Julie 1860 Antipolo St., Sta. Cruz, Operations Support Ann E. Manila Specialist 30 Sore, Alvin O. 171 Brgy. Real I. Bacoor, Cavite Project Manager 31 Sunga, Eric M. L2, B16, P3 Verona, Citta Italia, Head-Data Center Molino 3, Bacoor, Cavite and Operations Support Department 32 Suril, Mhyril M. Unit ID, Dela Cruz Compound Accountant #436 M. Leyva St., Old Zaniga, Mandaluyong City 33 Tabarangao, B26, L3, Phase 3A Jupiter St., Accounting Michelle C. Palmera Northwinds City, San Specialist Jose Del Monte, Bulacan 34 Tantan, Jennifer M. 43 Narra corner Guijo Streets, Head-Relationship Manuela 4-D, Pamplona, Management and Las Pias City Strategic Resources Group 35 Tecson, Lorna Z. 42-D Sao Paolo Street, Better Marketing Manager Living Subd., Don Bosco, Paraaque City 36 Tera, Cecille M. Road 10, No. 14 GSIS Hills Head-People Subd., Novaliches, Quezon City Management Department 37 Umali, Joseph 168-B Aurora Blvd., Brgy. Senior Applications Raymond B. Ermitano, San Juan City Support Analyst that MegaLink has duly filed with the Department of Labor and Employment (DOLE) the Notices of Termination due to Redundancy of the aforementioned employees and that said Notices of Termination were served to the said employees informing them of the effective date of separation. aDSIHc 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. 084-10 dated October 6, 2010) 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) that the employer pays benefits to the official or employee or his heirs as a consequence of such separation. (BIR Ruling No. 131-10 dated December 1, 2010) Accordingly, the separation pay to be received by the employees deemed as occupying redundant positions as a result of their separation from the service are exempt from income tax and consequently from the withholding tax prescribed under Section 79, Chapter XIII, Title II of the National Internal Revenue Code (NIRC) of 1997, as amended, as implemented by Revenue Regulations (RR) No. 2-98, as amended. (BIR Ruling No. 021-10 dated July 30, 2010) 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 credits 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 a sick leave to be able to avail of said leave credits. (BIR Ruling No. 199-2011 dated June 29, 2011) It is, however, understood that this exemption does not include the payment of the separated employees' salaries and the payment of the 13th month pay and other benefits in excess of the Php82,000 threshold as provided for under R.A. No. 10653 and implemented by Revenue Regulations No. 3-2015. 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