BIR Ruling No. 197-15

June 10, 2015 BIR RULING NO. 197-15 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 Aboitiz Equity Ventures, Inc. NAC Tower, 32nd Street, Bonifacio Global City, Taguig City, Metro Manila Attention: Mr. Xavier Jose Aboitiz Senior Vice-President-Chief HR Officer Gentlemen : This refers to your letter dated August 1, 2013, requesting exemption from withholding tax of the separation pay to be received by the employees of ABOITIZ EQUITY VENTURES, INC. ("The Company") due to redundancy pursuant to Section 32 (B) (6) (b) of the National Internal Revenue Code (NIRC) of 1997, as amended. HTcADC It is represented that ABOITIZ EQUITY VENTURES, INC. is a domestic corporation duly registered and existing under the laws of the Philippines with Securities and Exchange Commission (SEC) Company Registration No. CEO2536; that it is a listed holding company whose subsidiaries are engaged in the business of power generation, distribution and retail services, food manufacturing and banking and financial services activities; that on November 14, 2011 The Company ,through the Office of the Vice-President for Human Resources, issued a management memoranda announcing the relocation of the company's head office from Cebu to Manila; that the planned relocation, which involved moving employees out of Cebu, made it necessary for the management to review and rationalize its current workforce structure, with the aim of placing the right number of qualified people in the organization; that the review resulted to a company-wide restructuring wherein certain positions were considered as feasible for merging with other existing positions while others were deemed operationally unnecessary; that as a consequence, certain existing positions were taken out in The Company's plantilla leading to a workforce reduction; that months after the initial relocation announcement, several redundant positions were identified effective November, 2012, thus, requiring to permanently terminate the services of the following employees, to wit: Employee Address Position Jesus D. Naquila 2 Maple St. Woodestate Village AVP Specialized 2, Molino, Bacoor, Cavite Risk Management Esmeralda C. Dao 25-C Gorordo Avenue, Purok Admin. Support 5, Camputhaw, Cebu City Services Officer John Francis C. Alvarado 487-F P. Del Rosario Ext. Corplan Senior Cebu City Analyst Minuel Carmela N. Franco Tower 2 Citylights Gardens AVP for Investor Condominium, Nivel Hills, Relations Lahug, Cebu City Bella V. Montenegro Purple Duke St. Briza Subd. Executive Secretary Nangka, Consolacion, Cebu Richard C. Penero B15 L1, San Antonio St. DDF Senior Project Village, Mandug, Davao City Engineer Maria Carla Bren C/O Laura Villanueva, 617 Talent Deployment Vianney L. Yap Gov. Manuel Cuenco Avenue, Specialist Cebu City Mini A. Llanos Rainbow Village, Kinsang-an Cashier Pardo, Cebu City Lelia A. Balalilhi 21A Sitio Zapatera, Brgy. Luz, Treasury Assistant Cebu City Mary Jean S. Magluyan Cor. Molave Street, Lahug, Admin. Assistant Cebu City Edgardo D. Mahinay 1417 Andres Abellana Ext. Cashier Guadalupe, Cebu City Eleanor Rianne C. Tecson 62 Gallium Street, Deca Homes Branding and 2, Brgy. Tungkil, Minglanilla, Corporate Cebu Communication Specialist Allyn R. Guantero B6 L23 Phase 2B, Villa Leyson Admin. Assistant Subd. Bacayan, Cebu City Alma A. Casing 201 Escario Ext. Lahug, Financial Trader Cebu City Evelyn N. Paul 6th Street, Happy Valley Brand Subdivision, V. Rama Avenue, Communication Cebu City Officer Margaux Herrera-Caya 52 Eagle Street, Sto. Nio Employee Village, Cebu City Engagement Officer that ABOITIZ EQUITY VENTURES, INC. 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 informing them of its effective date. aScITE 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 Php30,000 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