BIR Ruling No. 124-14

May 15, 2014 BIR RULING NO. 124-14 Section 32 (B) (6) (b) of the Tax Code, as amended; BIR Ruling No. 199-11; BIR Ruling No. 084-10; BIR Ruling No. 131-10; BIR Ruling No. 021-10 Basic Holdings Corporation 24 Fortune Avenue Brgy. Fortune, Marikina City Attention: Lt. Gen. Salvador Mison (RET) President Gentlemen : This refers to your letter dated December 5, 2011 and January 16, 2014 requesting for confirmation of opinion that the separation benefits and other benefits of your retrenched employees 1 are exempt from income tax and consequently from withholding tax. It is represented that Basic Holdings Corporation (Basic Holdings) is a domestic corporation primarily engaged in providing management consultancy services to its affiliates. Due to the integration of business operations undertaken by Fortune Tobacco Corporation (FTC) and Philip Morris Philippines Manufacturing, Inc. (PMPMI), processes and functions common to both companies were streamlined. As a result of streamlining, FTC has undertaken massive job cuts involving not only its employees but also those services which were being outsourced to Basic Holdings. As a consequence of this reduction of Basic Holdings' workload, it was forced to trim down its operations resulting to lay-offs. To cushion the effect on employees who will be losing their jobs, Basic Holdings provided a separation package as follows: 1. Retirement benefit under the existing Retirement Plan a. Employees who attain the age of 60 or upon completion of 30 years of service; b. Employees who are at least 55 years old and have rendered at least 10 years of continuous service or 20 years of service. 2. Employees not qualified in the above category a. Thirty (30) Days pay for every year of Service. Furthermore, Basic Holdings has a BIR approved Retirement Plan. It appears that Basic Holdings provided two separation packages for its concerned employees: (1) retirement benefit under the existing plan, and (b) benefit for employees not qualified in the retirement benefit category. HCDaAS For employees availing of the first separation package, the retirement benefits under the BIR approved Retirement Plan to be received by the qualified employee-member shall be exempt from income tax provided the two conditions set forth by Section 32 (B) (6) (b) of the Tax Code of 1997, as amended, are met: 1) that the official or employee had been in the service of the same employer for at least ten (10) years; and (2) he is at least fifty (50) years old at the time of retirement. However, other benefits provided for in the Retirement Plan shall not be covered by the tax exemption unless they are also expressly exempt from tax pursuant to the other provisions of the Tax Code. (BIR Ruling No. 021-10 dated July 30, 2010) For employees availing of the second separation package, Section 32 (B) (6) (b) of the Tax Code of 1997, as amended, provides 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 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). Thus, Section 32 (B) (6) (b) of the Tax Code of 1997, as amended 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. 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 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. 131-10 dated December 1, 2010) HDTcEI 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. 199-2011 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 Php30,000.00 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) 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 Name Position Date Hired Separation Date 1 Bautista, Connie T. Accountant 03/18/1985 10/15/2010 2 Chan, Lance Kerwin D. Auditor 05/16/2009 12/31/2010 3 Chang, Stephen Jim I. Auditor 07/01/2007 12/31/2010 4 Cheng, Bryan Christopher L. Auditor 03/01/2007 12/31/2010 5 Chik, John Lery K. Auditor 02/16/2008 12/31/2010 6 Chua Reaport, Kerwin L. Auditor 07/01/2009 12/31/2010 7 Chua, Erickson C. Auditor 12/02/2008 12/31/2010 8 Chua, Richard Denver D. Auditor 08/01/2007 12/31/2010 9 Earnshaw, Emerenciana Merle P. HR Manager 09/01/2000 10/15/2010 10 Gaw, Daive Adison L. Auditor 02/01/2008 12/31/2010 11 Godoy, Edward Y. Auditor 12/02/2008 12/31/2010 12 Hundangan, Gilbert L. Supervisor Tr 07/01/1993 5/31/2011 13 Javier, Richard Frederick A. Auditor 05/02/2005 12/31/2010 14 Ko, Jeffreyson G. Auditor 12/01/2005 12/31/2010 15 Lao, Michael Lance S. Auditor 04/01/2009 12/31/2010 16 Leang, Albert S. Auditor 02/01/2008 12/31/2010 17 Lee, Jefferson L. Auditor 09/16/2006 12/31/2010 18 Lee, Patrick Xavier G. Auditor 07/01/2002 12/31/2010 19 Lim, Jackson L. Auditor 07/01/2008 12/31/2010 20 Lin-Adiong, I-Chun Supervisor 08/16/1999 10/15/2010 21 Loo, Rhyan T. Auditor 11/16/2005 12/31/2010 22 New, Carlston G. Auditor 02/16/2009 12/31/2010 23 Ng, Jorge A. Auditor 04/17/2006 12/31/2010 24 Ong, Philip L. Auditor 04/02/2001 12/31/2010 25 Pe, Peter H. Auditor 02/01/2008 12/31/2010 26 Sia, Charles Q. Plant Manager 10/01/1984 5/31/2011 27 Siy, Florence O. Accountant 08/07/2002 10/15/2010 28 So, Aldric Paul U. Auditor 08/01/2007 12/31/2010 29 So, Perry L. Manager 02/10/1988 5/31/2011 30 Sze, Dexter C. Auditor 02/01/2008 12/31/2010 31 Tan, Armando T. Auditor 09/01/1981 10/15/2010 32 Tan, Henson L. Auditor 07/01/2008 12/31/2010 33 Tan, Jeffrey Q. Auditor 08/01/2000 12/31/2010 34 Tan, Ric Alan C. Auditor 220-676-527 12/31/2010 35 Te, Reagan T. Auditor 03/01/2007 12/31/2010 36 Tiu, Robert C. Production Head 02/01/1993 5/31/2011 37 Uy, Jesus C. Jr. Materials Manager 11/05/1988 8/15/2013 38 Uy, John Joseph M. Auditor 06/01/1999 12/31/2010 39 Uy, Paul Michael T. Auditor 04/16/2004 12/31/2010 40 Yao, Mark Jesmond S. Auditor 02/16/2009 12/31/2010 Footnotes 1. See annex.