BIR Ruling No. 289-11

August 12, 2011 BIR RULING NO. 289-11 Tax Code of 1997, as amended, Section 32 (B) (6) (b); BIR Ruling No. 089-99; BIR Ruling No. DA-594-04 Cagayan Electric Power and Light Company, Inc. 33 Don Toribio Chavez St. Cagayan de Oro City Attention: Atty. Panfilo I. Paracuelles Head, HRM Department Gentlemen : This refers to your letter, dated February 22, 2011, requesting on behalf of Mr. Agustin Noriel B. Gabule, for tax exemption on his separation benefits pursuant to Section 32 (B) (6) (b) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended. Documents submitted disclosed that Mr. Gabule was hired as Purchasing Officer by Cagayan Electric Power and Light Company, Inc. (CEPALCO) on May 16, 1987; that as Purchasing Officer, Mr. Gabule exercises overall supervision of the purchasing unit of CEPALCO, ensures timely delivery of quality materials and services to the company, and oversees and ensures that all unit resources, processes, procedures and operations are performed in accordance with the set policies, standards and specifications with the end in view of improving the total performance of the unit; that in order to improve CEPALCO's operational effectiveness and efficiency, its purchasing function was contracted out and being handled by a legitimate job contractor, Cepalco Energy Services and Trading Corporation (CESTCO); and that the position being occupied by Mr. Gabule was declared redundant, by reason of which, Mr. Gabule was terminated from service and was paid his separation benefits. In reply, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code, 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 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 or initiated by him. cIADTC The abovementioned law requires the presence of two (2) 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. ( BIR Ruling No. 089-99 dated July 6, 1999) Since Mr. Gabule's separation is due to redundancy and, therefore, beyond his control, any and all amounts received by him as a result thereof, is exempt from all taxes and subsequently from the withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code of 1997, as amended, and implemented by Revenue Regulations (RR) No. 6-82, as amended. 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 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 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 Mr. Gabule's salary. 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