BIR Ruling No. 253-12

April 20, 2012 BIR RULING NO. 253-12 Sections 32 (B) (6) (b) and 79 of the Tax Code of 1997, as amended; BIR Ruling No. 425-2011; BIR Ruling No. 199-2011 Tahanan Homeowners' Association, Inc. Chrysanthemum Street, Tahanan Village Sucat, Paraaque City Attention: Augusto D. Tejada President Gentlemen : This refers to your letter dated October 12, 2011 requesting in behalf of TAHANAN HOMEOWNERS' ASSOCIATION, INC. for the exemption from withholding tax of the separation pay that its employees will be receiving as a result of their separation from employment due to cessation of operation of their undertaking pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. DcaCSE It is represented that TAHANAN HOMEOWNERS' ASSOCIATION, INC., a non-stock, non-profit organization, is organized primarily for the purpose of managing the affairs of the homeowners of Tahanan Village in Barangay BF Homes in Paraaque City which includes the management and operation of the waterworks system (operation of deepwells and distribution of water) in the said village; that due to the high cost of operating and maintaining the deepwells, including the drying up of some other wells in the said village, the homeowners have decided to source the water supply from Maynilad Water Services, Inc.; that on March 6, 2011, the Association, through its Board of Directors, entered into a Memorandum of Agreement with Maynilad Water Services, Inc. for the direct connection of all homeowners to the Maynilad water system and the take-over by Maynilad of the operation and maintenance of the existing water system of the Village; that with the take-over by Maynilad on August 24, 2011, the Association had effectively ceased operating and maintaining the water system in the Village, thus constraining the Board of Directors to terminate the following employees involved in the operation of the waterworks system whose services are definitely no longer needed effective as of the close of business hours on November 15, 2011: Name of Employee Position Date of Employment 1) Cecilia N. Abasola Accounting Assistant June 16, 1984 2) Rogelio A. Cadungog Deepwell Operator October 21, 1987 3) Rodrigo O. Fabroa Deepwell Operator November 1, 1984 4) Eduardo B. Hufancia Deepwell Operator September 1, 1988 5) Renato R. Reyes Deepwell Operator January 18, 1993 In support of its request, you have submitted the following documents: 1) Sworn certification executed by Augusto D. Tejada, President of TAHANAN HOMEOWNERS' ASSOCIATION, INC. attesting to the fact that the separation from employment of its employees was due to cessation of operations or a cause beyond the control of the said employees; 2) Copies certified by the Department of Labor and Employment (DOLE): ESTCHa a) Establishment Termination Report; b) List of Permanently Terminated Workers Due to Cease n Operation of Business; c) Written notice to the DOLE at least one (1) month before the intended date of resignation/separation. 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 the 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 or initiated by him. 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. In view thereof, considering that the employees of TAHANAN HOMEOWNERS' ASSOCIATION, INC. enumerated herein, have been separated from the service of the employer due to cessation of operation and maintenance of the water system in Tahanan Village, a cause beyond the control of said employees, the amount received by the above-named taxpayers or by their heirs from their employer, TAHANAN HOMEOWNERS' ASSOCIATION, INC., as a consequence of separation from the service of the employer regardless of age or length of service, shall be excluded from the gross income and shall be exempt from taxation pursuant to Section 32 (B) (6) (b) of the 1997 Tax Code, as amended. Likewise, the separation benefits shall be exempt from withholding tax as prescribed by Section 79 of the 1997 Tax Code, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 and 12-2001. TSacCH Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the entitled separated employee. 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 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. 425-2011 dated November 4, 2011 and 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 n Note from the Publisher: Copied verbatim from the official copy.