Income Tax Exemption of Diageo Employees Terminated from Service under an Approved Redundancy Program

June 29, 2016 BIR RULING NO. 334-16 Section 32 (B) (6) (b), 1997 NIRC; BIR Ruling No. 555-2012; BIR Ruling No. 425-2011; BIR Ruling No. 008-2011 Quisumbing Torres 12/F, Net One Center 26th St. cor. 3rd Ave., Crescent Park West Bonifacio Global City, Taguig City Attention: Attys. Dennis G. Dimagiba and Maria Ana Camila C. Jacinto-Lagustan Gentlemen : This refers to your letter dated April 15, 2015 requesting on behalf of your client, Diageo Philippines, Inc. (Diageo for brevity) for confirmation of opinion that the separation benefits received by the latter's employees who have been terminated from service pursuant to an approved redundancy program due to the company's cost-cutting measures is exempt from income tax and consequently from withholding tax pursuant to Sec. 32 (B) (6) (b) of the 1997 Tax Code, as amended. Documents submitted show that Diageo (TIN 000-161-879-000) is a domestic corporation registered with the Securities and Exchange Commission (SEC) under Company Reg. No. 146920 on September 30, 1993. It is organized primarily to import, export, manufacture, market, distribute, buy and sell, by wholesale, all kinds of beverages and liquors and to deal in any materials, articles or things required in connection with or incidental to the importation, exportation, manufacturing, marketing or distribution of such products. Diageo's production plant was previously located at 111 Technology Avenue, Laguna Technopark, Bian, Laguna. Due to Diageo's intention to become a customer-driven organization that reduces cost, drives performance and promotes safety, and to achieve a competitive advantage in the marketplace, it conducted a review of its manufacturing footprint in Asia Pacific with the intention of increasing its competitiveness by streamlining production and reducing costs. In 2012, Diageo sold its manufacturing assets and its production plant. In order to achieve its goals for global structuring, Diageo also streamlined certain corporate and technical positions. As a result, Diageo was constrained to declare certain positions in the company as redundant. In BIR Ruling No. 230-2013 issued on June 20, 2013, our Office confirmed that the separation benefits received by Diageo's manpower complement previously declared redundant were exempt from income tax and withholding tax. As of 31 March 2015, an additional 15 employees were declared redundant. The employees and the relevant dates of their termination are summarized herein below: CAIHTE Name of Employee TIN Date of Date of Notice Termination Letter to the DOLE Elisa de Guzman 151-706-267 May 24, 2012 May 24, 2012 Rowena Nicerio 196-127-048 June 22, 2012 June 21, 2012 Allan Mallari 203-395-784 June 22, 2012 June 21, 2012 Rommel Turingan 139-327-983 June 22, 2012 June 21, 2012 Aries Mayuga 131-291-441 June 22, 2012 June 21, 2012 Jonathan Dolor 189-551-882 June 22, 2012 June 21, 2012 Ishmael Ordoez 157-483-862 September 26, 2012 September 28, 2012 Armela Sison 229-919-773 September 26, 2012 September 28, 2012 John Paul Guzman 215-542-691 September 26, 2012 September 28, 2012 Alec Tempongko 123-530-220 May 30, 2013 May 20, 2013 Ireneo Galicia 178-217-972 May 29, 2014 May 29, 2014 Jose Amando Alinas 136-002-805 May 29, 2014 May 29, 2014 Vernon Patrick Lapid 258-944-658 May 29, 2014 May 29, 2014 Raymund Zamora 103-638-443 May 29, 2014 May 20, 2014 Fe Olivia Mir 214-476-059 February 23, 2015 February 27, 2015 the employees whose services were terminated on ground of redundancy were each entitled to receive a separation package consisting of: 1) separation pay of three (3) months for every year of service; 2) commutation of accrued and unused vacation leave credits; and 3) final pay. The Establishment Employment Report was duly received by Department of Labor and Employment-NCR (MUNTAPARLAS Field Office) on several dates and the corresponding Notices of Termination due to Redundancy to the affected employees were also duly received by the afore-stated workers. 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. This Office has had several occasions to rule that 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. 008-11 dated 19 January 2011) In view thereof, this Office is of the opinion that since it appears that the employees of Diageo, as enumerated herein have proven to have been separated from the service of the employer because of redundancy, a cause beyond the control of said employees, any amount to be received by them as a consequence of said separation is exempt from income tax and consequently from the withholding tax prescribed under Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 and 12-2001. Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the entitled separated employee. (BIR Ruling No. 425-11 dated 4 November 2011) Also, 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. 425-11 dated 4 November 2011) 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 Php82,000.00 1 threshold under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. (BIR Ruling No. 555-12 dated September 6, 2012) 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. DETACa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. As amended by Revenue Regulations No. 3-2015 dated March 13, 2015.