BIR Ruling No. 123-14

May 15, 2014 BIR RULING NO. 123-14 Section 32 (B) (6) (b), 1997 NIRC; BIR Ruling No. 555-2012; BIR Ruling No. 199-2011 Danao & Associates Unit 501 Sunshine Plaza 219 N. Domingo St., San Juan City Attention: Ms. Salvacion M. Danao Gentlemen : This refers to your letter dated November 6, 2013 requesting on behalf of your client, Montecito Properties Incorporated (Montecito for brevity), for a confirmatory ruling that the separation package of its employees as a consequence of the implementation of its partial cessation of normal business operations is exempt from tax under Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. Documents submitted show that Montecito (TIN 048-004-663) is a duly registered domestic corporation with the Securities and Exchange Commission (SEC) under Registration No. A1996-06594 issued on October 31, 1996, with principal office at San Jose Drive, Barangay Canlubang, Calamba City, Laguna. Montecito's primary purpose is to acquire, hold and dispose of by purchase, lease, exchange, mortgage, donation or in any other manner, conditionally or absolutely, and to use, improve, develop, manage, sub-divide and hold for investment or otherwise, real property or any interest therein of any kind whether improved or unimproved, and to erect or cause to be erected on any real estate, buildings or other similar structure with their appurtenances. As of this date, Montecito has already achieved 99% sell-out rate, and neither holds nor intend to acquire any real estate property for present or future development. As a result of the review of its current business operations, the Board of Directors and Stockholders of Montecito in its meeting on October 9, 2012, approved the partial cessation of its commercial operations, resulting in the separation of thirty-two (32) regular employees. The above employees separation is covered under Article 283 of the Philippine Labor Code, to wit: IACDaS Art. 283. Closure of establishment and reduction of personnel. The employer may also terminate the employment of any employee due to the installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Ministry of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year. It is your opinion that under 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 because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall be excluded from the gross income and as such, shall be exempt from income tax regardless of age or length of service. For the said law to apply two (2) conditions should be present so that the employee benefits may be granted tax exemption, namely: (1) the official or 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 official or employee or his heirs receives any amount from the employer on account of such separation. Under Revenue Memorandum Order (RMO) No. 26-2011, the BIR reiterated that the processing of requests for rulings providing that amounts received by an official or employee from his employer for any other causes ( i.e. , not because of death, sickness or other physical disability) beyond the control of the said official or employee are tax exempt and shall continue to be processed at the Law Division in the National Office. The following is the list of Montecito's employees that will be separated from employment: No. Name of Employee TIN 1 ALIPIO MILA H 175-925-044 2 AMAR ROGELIO P 105-691-998 3 ANGELES ROMEO T 194-242-924 4 BAUTISTA NELSON N 151-634-321 5 CACAO RANDY A 238-778-219 6 CARAS EDWIN A 204-462-453 7 CONDE VICTOR OLIVER L 251-392-233 8 ENRIQUEZ REYNALDO C 154-628-707 9 GILE RONALD V 205-808-267 10 GUIDAVEN AVELINO U 131-747-050 11 HURTADO JAYSON R 280-141-037 12 JEMINO ELMER B 220-341-174 13 LA O' ROBERTO D 101-900-075 14 LEGASPI JENELYN A 171-152-227 15 LERON AVELINO E 131-747-524 16 MANAIG ROGELIO T 178-096-599 17 MATO RICKY T 919-005-676 18 MATO CHARLITA A 280-141-575 19 OSER ALLAN A 214-320-596 20 PACION APOLINAR P 238-778-347 21 PALIWANAN MAX B 238-778-515 22 PATUNGAN RANDY M 220-341-489 23 PRISCION HEROD P 111-006-629 24 REYES RICARDO JR. H 209-683-265 25. RIVERA ELEANOR P 121-784-458 26 SALIBA NICOLASA C 280-142-375 27 SILVA SERGIO J 238-778-849 28 SISON DOMINADOR G 195-626-626 29 TAGULALAP JENOS E 238-775-695 30 TIBAY ROLANDO L 177-545-755 31 UMADAC TOMMY G 209-683-249 32 WAGAS RENANTE S 156-209-683 that the Establishment Termination Report was duly received by DOLE-Regional Office No. IV-A on August 28, 2013 and that the respective Notices of Termination due to cessation of Montecito's normal business operation were duly received by all the affected employees. IcHTCS In reply, please be informed that 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 pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. The phrase "for any cause beyond the control of the 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. The 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 heir as a consequence of such separation. Accordingly, this Office hereby holds that any and all amounts to be received by the above-listed employees of Montecito as a consequence of the implementation of its partial cessation of normal business operations are exempt from income tax and consequently from the withholding tax prescribed by Sec. 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations (RR) No. 2-98, as amended. The payment of salaries, however, is subject to income tax and consequently to withholding tax. Moreover, pursuant to Section 2.78.1 (A) (7) of RR 2-98, as amended, 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. 199-11 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 Php30,000.00 threshold under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. (BIR Ruling No. 555-12 dated September 6, 2012) It is to be noted that the separation of the afore-named employees from the service must be the direct result of the partial cessation of business operations of Montecito and not due to the employee's qualification to the compulsory/optional retirement program of the company. 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 as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue