BIR Ruling No. 230-13

June 20, 2013 BIR RULING NO. 230-13 Section 36 (B) (6) (b) of the Tax Code of 1997, as amended; and Section 2.78.1 (A) (3) (a) and (A) (7) and of Revenue Regulations No. 2-98; BIR Ruling No. 481-12; and BIR Ruling No. 199-11 Quisumbing Torres 12th Floor, net one Center 26th Street corner 3rd Avenue Crescent Park West, Bonifacio Global City Taguig City, Philippines 1634 Attention: Attys. Dennis G. Dimagiba and Maria Ana Camila C. Jacinto-Lagustan Gentlemen : This refers to your letter dated November 20, 2012 requesting for a confirmatory ruling to the effect that the severance pay of Diageo Philippines, Inc. 's employees are exempted from payment of taxes pursuant to Revenue Memorandum Order No. 26-2011 dated June 13, 2011. TCDHaE It is represented that Diageo Philippines, Inc. was incorporated and registered with the Securities and Exchange Commission on September 30, 1993, primarily to import, export, manufacture, market, distribute, buy and sell, by wholesale, all kinds of beverages and liquors and to deal in any materials, articles or things required in connection with or incidental to the importation, exportation, manufacturing, marketing or distribution of such products. Diageo Philippines, Inc. 's production plant is located at 111 Technology Avenue, Laguna Technopark, Bian, Laguna. Due to Diageo Philippines, Inc. 's intention to be a customer-driven organization that reduces cost, drives performance, and promotes safety, and to achieve a competitive advantage in the marketplace, it conducted a review of its manufacturing footprint in Asia Pacific with the intention of increasing its competitiveness by streamlining production and reducing costs. In line with this, Diageo Philippines, Inc. , sold its manufacturing assets in April 2012 to a third party, which agreed to manufacture Diageo Philippines, Inc. 's products under a toll manufacturing agreement. As a result, Diageo Philippines, Inc. , was constrained to declare certain positions in the Company as redundant. On July 15, 2012, a total of thirty eight (38) employees have been declared redundant. The declaration of redundancy was made in seven (7) batches, with the last batch deemed redundant effective on July 15, 2012. Diageo Philippines, Inc. has duly notified the Department of Labor and Employment (DOLE) of the redundancy program by way of DOLE RKS Form 5-2011. The affected employees are the following: Name Date of Date of Notice to Termination Department of Labor Letter and Employment 1. Ivy Micahel B. Bacud February 24, 2012 February 24, 2012 2. Agustin S. Ariem February 24, 2012 February 24, 2012 3. Eugene L. Librando February 24, 2012 February 24, 2012 4. Jocelyn Rise O. Secarro February 24, 2012 February 24, 2012 5. Maira Cecilia Magno Bartolome March 14, 2012 March 14, 2012 6. Carlo Villasanta Enriquez March 14, 2012 March 14, 2012 7. Christian Consador Galero March 14, 2012 March 14, 2012 8. Christian Abecilla March 28, 2012 March 27, 2012 9. Arnelle Am-is March 28, 2012 March 27, 2012 10. Phil Bellosillo March 28, 2012 March 27, 2012 11. Jeffrey Calot March 28, 2012 March 27, 2012 12. Michael Casalla March 28, 2012 March 27, 2012 13. Adrian Casano March 28, 2012 March 27, 2012 14. Carmelo Cruz March 28, 2012 March 27, 2012 15. Herminio de Guzman March 28, 2012 March 27, 2012 16. Jear de Mc Cuttac March 28, 2012 March 27, 2012 17. Daniele Joy del Carmen March 28, 2012 March 27, 2012 18. Melvin Deomampo March 28, 2012 March 27, 2012 19. Dennis Ebitner March 28, 2012 March 27, 2012 20. Ramilo Jay Calipus March 28, 2012 March 27, 2012 21. Manuel Garganera March 28, 2012 March 27, 2012 22. Emmanuel Jacob March 28, 2012 March 27, 2012 23. Kenneth Lim March 28, 2012 March 27, 2012 24. Jonathan Luna March 28, 2012 March 27, 2012 25. Gaspar Marcelo March 28, 2012 March 27, 2012 26. Simonette Piedad March 28, 2012 March 27, 2012 27. Hector Santiago March 28, 2012 March 27, 2012 28. Patrick Serrano March 28, 2012 March 27, 2012 29. Michael Sibulo March 28, 2012 March 27, 2012 30. Renwick Sta. Ana March 28, 2012 March 27, 2012 31. Arleen Aldaba April 15, 2012 April 13, 2012 32. Ryan Archival Cedillo April 15, 2012 April 13, 2012 33. Fely Gapuz April 15, 2012 April 13, 2012 34. Jose Mechor Faller April 15, 2012 April 13, 2012 35. Victoria Peralta June 8, 2012 April 27, 2012 36. Marie Christine Nonato April 30, 2012 April 27, 2012 37. Angelita Plata June 14, 2012 June 14, 2012 38. Rowena Macatiag June 8, 2012 June 14, 2012 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 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 not initiated by him. DTAaCE The above-mentioned provision requires the presence of two (2) conditions in order that the benefits may be granted tax exemption, namely (1) the official or 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 official or employee or his heirs receives any amount from the employer on account of such separation. As noted, the employees' separation from employment was due to redundancy. Accordingly, where the employee is separated involuntarily from the service due to a cause beyond his control, the separation benefits received by them as a result thereof are exempt from income tax and consequently from withholding tax prescribed by Section 79 of the Tax Code of 1997 and as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling No. 481-2012 dated July 30, 2012) Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the separated employees. 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. It is, however, understood that this exemption does not include the payment to the employee of their salaries and the payment of the 13th month pay and other benefits in excess of 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 ascertained 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