BIR Ruling No. 134-15

April 30, 2015 BIR RULING NO. 134-15 Section 36 (B) (6) (b), NIRC of 1997, as amended; BIR Ruling No. 425-11; BIR Ruling No. 008-11 Siguion Reyna Montecillo & Ongsiako Law Offices 4th & 6th Floors, Citibank Center 8741 Paseo de Roxas, Makati City Attention: Atty. Ferdinand M. Hidalgo Atty. Ma. Corazon U. Del Castillo Gentlemen : This refers to your letter dated 16 May 2012 requesting, on behalf of your client, HERAEUS ELECTRONIC MATERIALS PHILS., INC. ("HEP"), confirmation of your opinion that the separation benefits of its employees who will be terminated due to redundancy caused by the closure of its manufacturing facility are exempt from income tax and consequently from the withholding tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. It is represented that HEP is a domestic corporation engaged in the production of gold bonding wires for the local market and microballs for the global market; that the recent developments in the industry and the rising cost of precious metals in the world market has brought about an increase in the utilization of copper and palladium-coated copper wires in the manufacture of HEP's products; that as a result, Heraeus group of companies has restructured its business strategy by reducing its manufacturing sites worldwide; that part of this restructuring is the closure of HEP's manufacturing facility in the Philippines but it shall, however, continue its sales and technical support business in the Philippines; that HEP have terminated the employment of seventy-five (75) employees; that on 30 May 2012, 6 August 2012, 9 August 2012, 28 August 2012, 2 October 2012, 18 October 2012, 29 October 2012, 26 November 2012, 9 January 2013, 4 March 2013, 2 May 2013 and 7 June 2013, HEP filed written notices of redundancy with the Department of Labor and Employment; and that the said notices of redundancy cover the seventy-five (75) employees who have been terminated by the company. In support of its request, HEP has submitted the certified copies of the Notices of Redundancy and Establishment Employment Reports filed with the Department of Labor and Employment (DOLE). The names, positions and dates of termination are as follows: Establishment Employment Report filed on May 31, 2012 Names Position 1. Amon, Melissa T. AP Operator 2. Bachiller, Shirley A. Production Clerk 3. Bagtas, Lucero M. AP Warehouse Clerk 4. Bautista, Grace D.C. AP Operator 5. Camaa, Mylyn M. AP Operator 6. Centeno, Virgilio E. AP Operator 7. Cosino, Mirriam M. Inspector 8. Cuayzon, John Camel A. AP Operator 9. De Sosa, Mirlo M. Sr. Line Leader 10. Fule, Mary Jane P. Inspector 11. Gustilo, Dave C. AP Operator 12. Hembrador, Jennifer L. AP Operator 13. Lajara, Agnes R. Inspector 14. Lanzaderas, Jeannilyn P. Inspector 15. Limboy, Edilberto E. AP Operator 16. Lumagui, Glen G. Line Leader 17. Manzalay, Gil M. AP Operator 18. Martinez, Noimie C. AP Operator 19. Montano, Joselito A. AP Operator 20. Pascua, Felisa D.L. Inspector 21. Peradilla, Joezel A. AP Operator 22. Poniente, Mary Ann A. Inspector 23. Sampole, Carmela A. AP Operator 24. Sernadilla, Nigelle A. Sr. Production Supervisor 25. Susulin, Charmaine C. Engineer 26. Tolentino, Princess S. AP Operator 27. Villamor, Mark Grimon S. AP Operator 28. Violenta, Chester Jake B. AP Operator Establishment Employment Report filed on May 31, 2012 Names Position 1. Maranan, Henry D.L. 1 Process Engineer 2. Ang, Christopher M. Process Sr. Supervisor 3. Panisa, Reuel O. Maintenance Staff-AP Establishment Employment Report filed on August 7, 2012 Names Position 1. Arias, Antonio M. Deputy Manager 2. Maranan, Henry D.L. * Process Engineer 3. Palma, Salvador, Jr. C. Plant Manager 4. Panisa, Reuel O. * SS Maintenance Staff 5. Santos, Ronald S. Deputy Manager, IT Establishment Employment Report filed on August 28, 2012 Names Position 1. Cailing, Sarah S. Accounting Staff Establishment Employment Report filed on October 2, 2012 Names Position 1. Delos Reyes, Jean B. Inspector 2. Ditaunon, Rogelio B. 2 BW Operator 3. Masbate, Benjamin C. 3 BW Operator 4. Maximo, Ryan Jayvie T. 4 Inspector 5. Moreno, Sonia L. 5 QM Sr. Supervisor 6. Pitacio, Tristan P. 6 BW Operator 7. Reyes, Petronilo M. 7 BW Operator 8. Suello, Marcelina F. 8 Sr. Sales Admin Officer Establishment Employment Report filed on October 18, 2012 Names Position 1. Ditaunon, Rogelio B. * BW Operator 2. Guimbaolibot, Jessica B. BW Operator 3. Marcelo, Albert G. BW Operator 4. Masbate, Benjamin C. * BW Operator 5. Maximo, Ryan Jayvie T. * Inspector 6. Medina, Gerlie L. BW Operator 7. Moreno, Sonia L. * QM Sr. Supervisor 8. Pitacio, Tristan P. * BW Operator 9. Reyes, Petronilo M. * BW Operator 10. Suello, Marcelina F. * Sr. Sales Admin Officer 11. Sumagui, Arman P. Inspector 12. Viar, Darwin G. BW Operator Establishment Employment Report filed on October 29, 2012 Names Position 1. Ambagan, Joan I. Sr. Buyer 2. Aron, Anthony B. QA Inspector 3. Diokno, Eduardo R. Sr. Line Leader 4. Marcelino, Ian Ferdinand D. Sr. IT Engineer 5. Martin, Ryan M. BW Engineering 6. Montano, Jeorge M. Senior Maintenance Staff 7. Pangangaan, Criztoper P. BW Sales Admin 8. San Miguel, Ricardo P. Production Supervisor 9. Sarmiento, Nelson P. QM Deputy Manager 10. Tionkiao, Edwin C. QM Technical Officer 11. Velasquez, Wee Marie C. Production Operator 12. Viar, Julieta R. Production Clerk Establishment Employment Report filed on November 26, 2012 Names Position 1. Colindres, Luvim A. Sr. Sales Admin Officer 2. Hernandez, Florizel A. BW Operations Manager 3. Igat, Alexander R. Production Supervisor 4. Macalindong, Ernesto C. Senior Logistics Officer 5. Mangayao, Nayafe I. Sales Admin Staff 6. Maranan, Henry D.L. * Process Engineer 7. Montoya, Imelda R. Senior Head 8. Natanauan, Sheina B. Sales Coordinator 9. Ong, Christopher M. * Process Senior Supervisor 10. Paridan, Marisa D. Human Resources Officer Establishment Employment Report filed on January 9, 2013 Names Position 1. Maido, Manie Lyn D. Sales Accountant 2. Paulino, Glerica M. Accounting Staff Establishment Employment Report filed on March 4, 2013 Names Position 1. Arcellana, Jimmy C. 9 Senior Supervisor 2. Sarmiento, Mary Claire L. 10 Senior Accountant Establishment Employment Report filed on May 2, 2013 Names Position 1. Montenegro, Ramon D. Senior Officer 2. Sta. Barbara, Noel D.G. Senior Officer Establishment Employment Report filed on June 7, 2013 Names Position 1. Deguit, Vilma V. Human Resource 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 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 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 ) In view thereof, this Office is of the opinion that since it appears that the employees of HEP enumerated herein have proven to have been separated from the service of the employer because of redundancy caused by the closure of HEP's manufacturing facility, a cause beyond the control of said employees, any amount to be received by them 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 No. 6-2001 and 12-2001. Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the entitled separated employee. ( BIR Ruling No. 425-11 dated 4 November 2011 ) Also, 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 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. 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 Footnotes 1. Per Extension of Notice Period dated August 17, 2012 addressed to Maranan, his employment was extended to December 2012. DOLE was notified regarding said Extension in Extension of Notice Period addressed to DOLE dated August 28, 2012. *. Previously listed in Establishment Employment Report 2. Per Extension of Notice Period addressed to Ditaunon and dated October 18, 2012, Ditaunon's employment is extended to November 17, 2012. DOLE is duly notified per Extension of Notice Period dated October 18, 2012. 3. Per Extension of Notice Period addressed to Masbate and dated October 18, 2012, Masbate's employment is extended to November 17, 2012. DOLE is duly notified per Extension of Notice Period dated October 18, 2012. 4. Per Extension of Notice Period addressed to Maximo and dated October 18, 2012, Maximo's employment is extended to November 17, 2012. DOLE is duly notified per Extension of Notice Period dated October 18, 2012. 5. Per Extension of Notice Period addressed to Moreno and dated October 18, 2012, Moreno's employment is extended to November 17, 2012. DOLE is duly notified per Extension of Notice Period dated October 18, 2012. 6. Per Extension of Notice Period addressed to Pitacio and dated October 18, 2012, Pitacio's employment is extended to November 17, 2012. DOLE is duly notified per Extension of Notice Period dated October 18, 2012. 7. Per Extension of Notice Period addressed to Reyes and dated October 18, 2012, Reyes' employment is extended to November 17, 2012. DOLE is duly notified per Extension of Notice Period dated October 18, 2012. 8. Per Extension of Notice Period addressed to Suello and dated October 18, 2012, Suello's employment is extended to November 17, 2012. DOLE is duly notified per Extension of Notice Period dated October 18, 2012. 9. Per Extension of Notice Period addressed to Arcellana and dated March 22, 2013, Arcellana's employment is extended to April 30, 2013. DOLE is duly notified per Extension of Notice Period dated April 18, 2013. 10. Per Extension of Notice Period addressed to Sarmiento and dated March 22, 2013, Sarmiento's employment is extended to April 30, 2013. DOLE is duly notified per Extension of Notice Period dated April 18, 2013.