BIR Ruling No. 255-13

July 10, 2013 BIR RULING NO. 255-13 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 SGS Gulf Limited 20/F Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Michelle C. Garcia Human Resources Director Gentlemen : This refers to your letter dated April 23, 2012, requesting for ruling that the separation benefits and other benefits of your employees due to redundancy are exempt from income tax and consequently from withholding tax. It is represented that SGS GULF LIMITED with Tax Identification No. 225-537-223-000, is a regional operating headquarters engaged in the activities of a data processing unit and related services including the analysis, computation and determination of the classification and valuation of goods exported and/or imported on the basis of information gathered by it or its branch offices abroad through the physical inspection, testing and/or sampling conducted by SGS Societe Generale de Surveillance SA's affiliates in the Asia Pacific Region and world-wide and the transmission and/or export of the resulting reports to the aforementioned affiliates, to the governments concerned and the other parties involved in the transaction, and generally, to carry on business having any direct connection with the foregoing activities and provide to SGS Societe Generale de Surveillance SA's affiliates outside the Swiss Confederation and, more specifically, in the Asia Pacific Region general support service, such as but not limited to: general administration and planning; business planning, development and co-ordination; sourcing and procurement of raw materials and components; corporate finance advisory services; research and development services and product development; technical support and maintenance; and data communication and in international trade with affiliates, subsidiaries, or branch offices in the Asia-Pacific Region and other foreign markets; that the main reason for retrenchment of workers is the cancelation by one of the clients of its contract in the Philippines and decided to operate back in the USA; that SGS GULF LIMITED shall permanently terminate twenty seven (27) 1 of its employees, to wit: EcAISC Employment Separation Employee Name Status Position Hire Date Date Mercene, Ellese Regular Customer Service 12/27/2008 8/1/2012 Christine Associate Morales, Irna Regular Customer Service 6/1/2011 6/8/2012 Associate Namavar, Joan Probationary Customer Service 2/20/2012 5/29/2012 Associate Panadero, Philline Regular Customer Service 6/29/2011 8/1/2012 Associate Reyes, Leo Markko Regular Customer Service 6/1/2011 5/21/2012 Associate Sales, Alexander Regular Customer Service 10/24/2011 8/1/2012 Associate Laureano, Bryan Regular Call Center 3/15/2011 5/21/2012 Manager Taytayon, Argie Regular Customer Service 3/15/2011 5/21/2012 Associate Apostol, Lyd Gillian Regular Customer Service 6/1/2011 5/27/2012 Associate Nopuente, Ruth-Chel Regular Customer Service 6/2/2011 5/27/2012 Associate Lindaya, Ma. Sabrina Regular Customer Service 6/29/2011 5/21/2012 Associate Lanipa, Dennis Regular Customer Service 6/29/2011 5/21/2012 Christopher Associate Navarro, Hilton Regular Customer Service 6/29/2011 5/21/2012 Associate Adam, Norwina Probationary Customer Service 2/20/2012 5/21/2012 Associate Villamin, Ronald Probationary Customer Service 2/20/2012 5/21/2012 Associate Posadas, Jacqueline Probationary Customer Service 2/20/2012 5/21/2012 Associate Gabriel, Rachelle Probationary Customer Service 2/23/2012 5/21/2012 Associate 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) Accordingly, the separation pay to be received by the employees deemed as occupying redundant positions as a result of their separation from the service 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) SEcADa 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. 8 affected employees were rehired and 2 have voluntarily resigned prior to effectivity date.