BIR Ruling No. 250-11

July 26, 2011 BIR RULING NO. 250-11 Section 32 (B) (6) (b); BIR Ruling No. SB(003)022-2010; BIR Ruling No. 196-93; BIR Ruling No. 211-92; BIR Ruling No. DA-594-04 Mr. Vicente R. Baquiran Isabela II Electric Cooperative, Inc. Government Center, Alibagu Ilagan, Isabela Sir : This refers to your letter dated July 9, 2010 requesting for a ruling that the separation benefits you will receive from Isabela II Electric Cooperative, Inc. (ISELCO II TIN 002-833-960-000) is exempt from withholding tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. Documents submitted show that Vicente R. Baquiran (TIN 122-652-264), 48 years of age, is a Lineman of ISELCO II. Based on the Medical Certificate issued by Celso A. Calasinao, M.D. of Tumauini Community Hospital in Tumauini, Isabela, you were diagnosed with Diabetes Mellitus Stage II and Hypertension Stage II. Your continuous employment and performance of regular duties would endanger your physical well-being and deemed it proper to tender your resignation from the employ of ISELCO II at the close of business hours on July 1, 2010. 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 Tax Code. (BIR Ruling No. 211-92 dated July 24, 1992) 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 heirs as a consequence of such separation. DAETHc In view thereof, this Office is of the opinion, as it hereby holds, that any and all amounts which you will receive as a result of your separation from the service of your employer due to the aforesaid poor health condition is exempt from income tax and consequently from 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. SB(003) 022-2010 dated May 17, 2010). However, pursuant to Sections 2.78.1 (A) (3) and (7) of RR No. 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 sick leave to be able to avail said leave credits (BIR Ruling No. DA-594-04 dated November 23, 2004) It is, however, understood that the payment of your salary is not exempt from income tax and consequently from withholding tax. (BIR Ruling No. 196-93 dated May 5, 1993) It is emphasized that we are granting this relief (for these disease types) only because of the nature of your job. But if your work does not entail physical danger, we will not grant an exemption for these kinds of ailments. 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