BIR Ruling No. 227-13

June 20, 2013 BIR RULING NO. 227-13 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 Veronica S. Grafil L 5 Blk. 7 Humel Heritage Home Malolos, Bulacan Madam : This refers to your letter dated June 16, 2012 requesting for tax exemptions of your separation pay due to retrenchment while being employed with Allegro Pacific (Phils.), Inc. aESICD It is represented that you are an employee of Allegro Pacific (Phils.), Inc., as a Fund Custodian from October 18, 1995; that on April 20, 2012, Allegro Pacific (Phils.), Inc., notified you that your employment with the company will cease effective at the close of working hours on May 31, 2012; and that on May 28, 2012, Allegro Pacific (Phils.), Inc. notified the Department of Labor and Employment (DOLE) of your termination from the service as part of the company's retrenchment program effective June 1, 2012. It is further represented that Allegro Pacific (Phils.), Inc. (Employer) and Unified Labor Organization Allegro Pacific (Phils.), Inc. (Union) entered into a CBAs, section 9 of the CBA which provides, to wit: "RETRENCHMENT" Section 9. Regular employees of the Company who may be retrenched, laid off, not due to serious business losses or financial reverses resulting to cessation of operation, will be entitled to one-half (1/2) month pay for every year of service provided that the total separation pay shall not be less than a minimum of one (1) month pay and that it will be computed at his/her basic salary rate; dismissed employees with cause or for theft or any criminal act are not entitled to any separation pay. To avoid any doubt, retirement-eligible employees who are retrenched/laid off as described in this section shall be entitled to either the retrenchment benefits herein or their accrued retirement benefits, whichever sum is higher, but not both. Retirement eligibility shall be in accordance to the definition provided by Section 8 1 of the "Retirement and Disability Benefits" clause of this agreement." The retrenchment pay was computed based on the Optional Retirement provision of the current CBA since you are already entitled to the benefit having serving the Company continuously for 17 years. Further, the optional retirement benefit computation resulted to a much higher benefit accruing to you, thus, per computation of "Retrenchment Benefits for Veronica S. Grafil": Amount Benefits at 24 days/yr of service = 15 years 215,697.60 Benefits at 10 days/yr of service = 2 years 11,983.20 TOTAL 227,680.80 ========= 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) 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) CHDAEc Accordingly, since your separation from service was due to retrenchment because of the reduction of workforce (stiff market competition), a cause which is beyond control of the employer, Allegro Pacific (Phils.), Inc., any and all amounts received by you as a result thereof 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. 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 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 Footnotes 1. Section 8. . . . The following shall be used as basis in determining the benefit of a retiree: Length of Service Equivalent Retirement Benefit (Continuous service) 5-9 years 16 days for every year of service 10-16 years 22 days for every year of service 17 years and above 24 days for every year of service (up from 22 days from previous agreement)