BIR Ruling No. 135-14

May 20, 2014 BIR RULING NO. 135-14 Section 32 (B) (6) (b), 1997 NIRC; BIR Ruling No. 555-2012; BIR Ruling No. 114-2012; BIR Ruling No. 199-2011 AP Renewables, Inc. NAC Tower, 32nd St., Bonifacio Global City Taguig City Attention: Mr. Michael B. Pierce President and Chief Operating Officer Gentlemen : This refers to your letter dated October 23, 2013 requesting for a confirmation of opinion that: 1) the compensation received by an employee or by his heirs from the employer as a consequence of separation of such employee from the service by reason of redundancy and/or for cause beyond the control of the said employee is exempt from taxes and consequently to withholding tax; and 2) the separation benefits are deductible from the company's gross income for being an ordinary and necessary trade or business expense. Documents submitted show that AP Renewables, Inc. (TIN 006-893-465-000) is a duly registered domestic corporation engaged in the business of power generation and other related activities, it was registered with the Securities and Exchange Commission (SEC) under Company Reg. No. CS200715979. AP Renewables, Inc. on September 16, 2013, announced the implementation of a redundancy program, which involved the streamlining of its operations on a company-wide basis. The situation made it necessary for management to review and rationalize its current workforce structure, with the aim of ensuring sustainability of operations despite the low volume of supply of steam and high production cost in converting said steam into electricity. After careful evaluation, the administration of AP Renewables, Inc. is compelled to implement a company-wide restructuring wherein certain positions were considered as feasible for merging, while others were deemed operationally unnecessary. As a consequence, certain existing positions were taken out from its plantilla leading to a workforce reduction. STcADa The following is the list of AP Renewables, Inc.'s employees that will be separated from employment: No. Name of employee Age Occupation/Skill 1 Edwin E. Abad, Jr. 27 C & I Technician I 2 Ma. Victoria A. Belmes 56 Chemical Engineer 3 Reynaldo B. Borcelis 58 Operator 2 4 Tito L. Brizuela, Jr. 52 Safety Officer 5 Bonifacio R. Brosas 54 Electrical Technician I 6 Raul C. Brosas 56 Operator 2 7 Jose D. Canezo, Jr. 54 Mechanical Engineer I 8 Efren C. Clavecillas, Sr. 60 Operator 2 9 Miguel C. Comot, Jr. 59 Mechanical Technician I 10 Asterio C. Credo, Jr. 46 Electrical Technician I 11 Roy D. Daculio 48 Mechanical Engineer 12 Elmer C. Dacuno 53 Operator 2 13 Eleanore D. Dalde 52 Warehouse Officer 14 Jaime M. de Jesus, Jr. 54 Condition Monitoring Engineer 15 Alvin M. Enguero 41 Safety Technician 16 Ma. Bianca I. Falcon 47 Accounting Supervisor 17 Salve V. Lizardo 37 Secretary 18 Virgilio G. Macinas 56 Electrical Engineer 19 Sandie C. Ner 56 Electrical Technician I 20 Emmanuel R. Pesebre 51 Performance Engineer 21 Arnel C. Repotente 48 Mechanical Technician I 22 Fe R. Rubio 51 PCO/Environmental Officer 23 Alvin Y. Salonga 32 Technical Buyer 24 Jaime B. Sarilla 49 Storekeeper 25 Felecito C. Torrente 46 Electrical Leader 26 Odon Q. Verbo, Jr. 47 Operator 2 27 Vicente Jonas C. Zepeda 43 Planning Engineer 28 Candelaria O. Aguilar 51 Chemical Engineer the Establishment Termination Report was duly received by DOLE-Regional Office Nos. V and IV-A on September 20, 2013. The Release, Waiver and Quitclaim executed by and between AP Renewables, Inc. and the affected employees stating the separation benefits received by each of them as a result of the cessation of their employment effective October 20, 2013 were all notarized on September 19, 2013. 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. SaCDTA Accordingly, this Office hereby holds that any and all amounts to be received by the above-listed employees of AP Renewables, Inc. as a consequence of the implementation of its redundancy program 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 aforesaid redundancy of AP Renewables, Inc. and not due to the employee's qualification to the compulsory/optional retirement program of the company. Finally, the expenses incurred by AP Renewables, Inc. in providing the separation 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. (BIR Ruling No. 114-2012 dated February 22, 2012) EASIHa 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