BIR Ruling No. 274-11

August 5, 2011 BIR RULING NO. 274-11 Section 32 (B) (6) (b) Tax Code of 1997; BIR Ruling DA-068-00; BIR Ruling No. 069-98; BIR Ruling No. DA-594-04 Taiyo Yuden (Philippines), Inc. Mactan Economic Zone Lapu-Lapu City Attention: Domingo Dennis A. Mendoza Gentlemen : This refers to your letter dated March 30, 2011 requesting, on behalf of Ms. Maria Fe S. Maarat, for tax exemption on her separation benefits on account of her separation from employment due to a disabling illness. It is represented that Ms. Maarat is an employee of Taiyo Yuden (Philippines), Inc., with a position of a Production Operator; that on October 1, 2010, Ms. Maarat was examined by the company's physician to be suffering from Cardiovascular Disease and Hypertensive Intracerebral Hemorrage Left Basal Ganglia; that the said illness affected Ms. Maarat's performance of her duties and responsibilities with the company and would endanger her life if she would continue to work; and that by reason thereof, Ms. Maarat's service in the company was terminated with a grant of disabling illness benefits. In reply thereto, 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 said official or employee is exempt from taxes regardless of age or length of service. The above-mentioned law requires the presence of these two conditions in order that the employee benefits may be granted tax exemption: (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. Since the separation from service of Ms. Maarat was due to sickness, any and all amounts received by her as a result thereof are exempt from income tax and consequently from the withholding tax prescribed by Section 79 of the Tax Code of 1997 and as implemented by Revenue Regulations No. 6-82, as amended. ( BIR Ruling DA-068-00 , dated February 2, 2000) Moreover, 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 of Ms. Maarat not exceeding ten (10) days during the year, is not subject to income tax and consequently to the withholding tax. Conversely, the cash equivalent of her 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 of said leave credits. ( BIR Ruling No. DA-594-04 dated November 23, 2004) Finally, the tax exemption does not include the company's payment of Ms. Maarat's salary. ( BIR Ruling No. 069-98 dated October 6, 1998) 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