BIR Ruling No. 228-13

June 20, 2013 BIR RULING NO. 228-13 Sec. 32 (B) (6) (b) of the Tax Code of 1997, as amended; BIR Ruling No. 009-11; BIR Ruling No. 199-11; BIR Ruling No. 555-12 Manalo Jocson & Enriquez Law Offices 7th Floor, The Infinity, 26th Street, Bonifacio Global City Taguig City Attention: Atty. Marichelle B. Recio Gentlemen : This refers to your letter dated November 19, 2012, requesting in behalf of REMEC BROADBAND WIRELESS INTERNATIONAL, INC. (REMEC for brevity) ,for the issuance of a Confirmatory Ruling that the separation benefits to be received by employees affected on account of retrenchment are exempt from income and withholding tax. SETaHC It is represented that REMEC (formerly Technology Phils.,Inc.),with Taxpayer's Identification No. (TIN) 240-248-045-000, is a corporation duly organized and existing under the laws of the British Virgin Islands with principal office address at 103 Innovation Drive, Carmelray Industrial Park 1, SEZ, Canlubang, Calamba City, Laguna, and is primarily engaged in the manufacture, fabricate, and design of microwave and millimeterwave components and subsystems for export. It is also represented that due to lack of market/slump in demand, REMEC, in exercise of management prerogative, decided to retrench Two Hundred Thirteen (213) of its employees to prevent business losses; that the following Two Hundred Thirteen (213) affected employees were notified by REMEC Management on November 15, 2012, namely: 1. Abergas, Gloria Comia 2. Ablis, Bena Fernando 3. Adante, Karlo Delgado 4. Agustin, Rowena Macasinag 5. Alcantara, Cristina Barilla 6. Alcantara, Lorena Elevado 7. Alemaa, Julius Tandang 8. Allingag, Maricel Bayla 9. Altas, Joel Tapalla 10. Ambas, Ronwaldo Apelo 11. Amil, Mega Villanueva 12. Andallo, Reynaldo Aquino 13. Angay, Melvin Ramos 14. Angeles, Maria Katrixia Gerona 15. Anglo, Aldrin Dones 16. Anguluan, Jovy Catubag 17. Aquino Jr. Mario Quidem 18. Asentado, Arlene Ibarra HDCAaS 19. Asis, Luz Grace Sagansay 20. Asuncion, Marilou Mendoza 21. Babagay, Anita Borgueta 22. Bacaoco, Rosalyn Velez 23. Bachar, Jackie Lou Leao 24. Bacod, Ruel Caponpon 25. Balmaceda, Wiljun Ranges 26. Basig, Edriza Astejada 27. Bayabay, Ritche Bandal 28. Belo, Mark Edward Oruga 29. Belonza, Genoveva Codera 30. Biay Jr.,Melanio Solis 31. Blanco, Rommel Umandal 32. Bual, Jey-R Benavente 33. Budol, James Gabriel 34. Caampued, Jennilyn Velasco 35. Cabauatan, Carlo Camaclang 36. Cabello, Larry Comia 37. Cabral, Nichelle Valencia 38. Cabuay, Rowena Peralta 39. Caburan, Joy Baraquea 40. Cabuyao, Brian Cabile 41. Caldozo, Almar Nepomuceno 42. Calingasan, Lea Evangelista 43. Calonzo, Lilybeth Napiza 44. Camasis, Gea Bobis cHTCaI 45. Camba, Paul Simon Medalla 46. Cambel, Hazel Lungcay 47. Cancino, Eugene Claveria 48. Candelario, Edwin Paglingap Batusis 49. Canie A, Rezalina Luna 50. Canlas, Mark Christian Donato 51. Carada, Chito Lucero 52. Carpena, Geoffrey Clanor 53. Carrillo, Michael Anthony De Vera 54. Casacop, Jovelyn De Guzman 55. Casco Ariel Robles 56. Castillo, Jonathan Marc Fule 57. Catapia, Marvin Porillo 58. Catapia, Melody Esguerra 59. Catinguel, Jaysop Parioan 60. Cenizal, Girlie Baltazar 61. Cera, Leslie Alvear 62. Cerezo, Loreto Estrada 63. Cernada, Ronie Longakit 64. Cernada, Rowena Longakit 65. Claveria, Jhon Chris Villarazo 66. Concepcion, Harold Lacro 67. Corpuz, Dennis Manaoat 68. Dapulang, Hector Baas 69. De Juras, Cristina Delos Reyes 70. De Leon, Glenn Quillopo SEcITC 71. Degullado Mary Ann Pangpang 72. Del Mundo, Reymond De Mesa 73. Dela Cruz, Cecilia Carandang 74. Dela Cruz, Marice Alviar 75. Dela Cruz, Gilbert Villareal 76. Dela Cruz, Edmar Verde 77. Delamida, David Argente 78. Delfinado, Joseph Rosal 79. Delos Santos, Russel Sison 80. Diaz, Giebert Cabrillas 81. Doculan, Rustico Hidalgo 82. Domalanta, Richard De Vera 83. Dullas, Nio Dames 84. Dupaloc, Benie Calanget 85. Elemos, Jayson Castillo 86. Enriquez, Marilu Ponce 87. Esquivel, Eulogio Condino 88. Esteban, Rhundy Doria 89. Fabros, Jaquilyn Nicanor 90. Fernandez, Sherelyn Taan 91. Flores, John Carlos Alomia 92. Francia, Thomas Joseph Cansanay 93. Franco, Marianne Del Mundo 94. Galope, Alden Dictado 95. Gamo, Roel Ramos 96. Garcia, Kenneth Cabales SECcIH 97. Garcia, Levi Viray 98. Garcia, James Canuela 99. Garibay, Rommel Aguilar 100. Gawat, Jeffrey Pareja 101. Glorioso, Elgielyn Gromo 102. Guevarra, Lemuel Miraflor 103. Guevarra, Josielyn Belen 104. Guevarra, Oliver John Tegelan 105. Guico, Cheenee Girl Manaig 106. Hipolito, Laurenz Jay Perilla 107. Jarata, Kristierra Gomez 108. Juacalla, Rhona Racoma 109. Kimao, Reny Docyogen 110. Lagao, Arman Joaquin 111. Lagula, Gilbert Bartolome 112. Landicho, Analyn Landicho 113. Lanzanas, Lariza Erasga 114. Laurito, Albert Canita 115. Leong, Jowellyn Cardeo 116. Leopando, Rosalie Balbieros 117. Lozada, Mark Lacida 118. Luna, Jimwell Sarmiento 119. Mabasa, Catherine Veran 120. Macasinag, Daniel Conese 121. Malabuyoc, Cheryl Marasigan 122. Manalo, Kristomar Nanson CSDTac 123. Mandap, Arlen Bori 124. Mapalad, Ronnel Galang 125. Mara, Elmer Gonzales 126. Martinez, Kelly Braga 127. Marzan, Princess Alcantara 128. Matala, Sheena Joy Bayro 129. Matriano, Rovin Odoo 130. Mejia Jr.,Pascual Torio 131. Melendez, Virgie Mararac 132. Mendoza, John Brian Severino 133. Meturada, Alexander Aldaca 134. Micutuan, Jhumar Casipong 135. Montalvo, Ramiro Pineda 136. Mose, Bernard Paine 137. Motas, Arnel Valdez 138. Napiza, Donald Dela Cruz 139. Napiza, Arvin Barrameda 140. Nievarez, Jesel Nazarionda 141. Notada, Bernardo Siasat 142. Olea, Allyson Basilio 143. Oraa, Princess Annie De Mesa 144. Orcullo, Daisy Dichoso 145. Pagcaliwagan, Mary Grace Capuno 146. Pagsaligan, Juvy General 147. Palay, Franklin Dela Cruz 148. Parian, Joel Geronimo DETACa 149. Paz, Mary Grace De Gala 150. Pecaa, Ely Ayag 151. Pecayo, Arlene Navallo 152. Pelaez, Donalyn Enriquez 153. Petate, Regie Cansicio 154. Pinote, Rodel Redoa 155. Pio, Renante Albis 156. Ponciano, Eleuterio Daganasol 157. Pusag, Edmond Jose 158. Pusag, Edson Jose 159. Queano, Mark Tulagan 160. Quibrantos, Jailil Santillana 161. Quinquileria, Mariflor San Ramon 162. Rafon, Leny Castro 163. Ragsac, Joy Delmendo 164. Ramos, Mariel Rosit 165. Ramos, Wea May Balbido 166. Ramos, Jay-Arr Mendoza 167. Rasonabe, Anderson Espaldon 168. Rebolledo, Michael Ferrer 169. Relano, Syna Mae Zaldivia 170. Relevo, Gina Morales 171. Remalla, Cathleen Grace Ayao 172. Reyes, Maria Giselle Villamayor 173. Rioto, Joana Marie Raceus 174. Rivera, Ace Salvador acHCSD 175. Rizalte, Rowell Furing 176. Rodelas, Jun Peralta 177. Rodriguez, Leah Bathan 178. Rogel, Espiranza Espineli 179. Rosales, Arjay De Vera 180. Rosales, Rizzalyn Villacorta 181. Rosario, Jordan Barlolong 182. Rosario, Jessie James Espiritu 183. Rueda, Marites Tubil 184. Salamatin, Leo Demerey 185. Salazar, Emmanuel Lavarias 186. Sallao, Christopher Glenn Lumanog 187. Samson, Alquinn Junio 188. Sara, Jenny Babe Monida 189. Segovia, Maria Milca Mobino 190. Taega, Mary Ann Siason 191. Tercero, Romeo Mapalad 192. Tobias, Ma. Realyn Fampula 193. Torio, Raymund Gonzalo 194. Tornilo, Jenelyn Mangubat 195. Tubil, Jocelyn Barrameda 196. Untalan, Rjalyn Javier 197. Ureza, June Michael Reyes 198. Velasquez, Adrian Prado 199. Vergara, Emeliana Cueto 200. Vergara, Cheryl Cabredo cSIACD 201. Vergara, Jomar Bermundo 202. Villamor, Cristy Florentino 203. Villanueva, Marjorie Abella 204. Villanueva, Dennis Manimtim 205. Viray, Lea Rizaldo 206. Viray, Melchor Bautista 207. Visperas, Romeo Lalangan 208. Vito, Lorgene Juson 209. Vocal, Elvie Baldevarona 210. Yabut, Arlene Bonifacio 211. Zabala, Iluminado II Jr. Jasmin 212. Zara, Revy Dapog 213. Zarraga, Marilyn Decena and that a Notice of Retrenchment was sent to the Department of Labor and Employment (DOLE) which resulted in the Establishment Termination Report duly received by DOLE-NCR on November 15, 2012. 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. Accordingly, this Office hereby holds that any and all amounts to be received by your employees affected by the retrenchment program 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. The payment of salaries, however, is subject to income tax and consequently to withholding tax. (BIR Ruling No. 009-11 dated January 19, 2011) IDAaCc 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) Lastly, the separation from the service must be the direct result of actual retrenchment implemented and not due to the employee's qualification to the compulsory/optional retirement program of the company. 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