BIR Ruling No. 362-12

May 31, 2012 BIR RULING NO. 362-12 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 Fortune Tobacco Corporation Brgy. Fortune, Marikina City Attention: Cesar N. Santos VP for Labor and Industrial Relations Gentlemen : This refers to your letter dated September 14, 2011 requesting for confirmation of opinion that the separation benefits and other benefits of your retrenched employees are exempt from income tax and consequently from withholding tax. It is represented that Fortune Tobacco Corporation is a domestic corporation primarily engaged in the manufacture of cigarettes. Last February 25, 2010, Fortune Tobacco Corporation and Philip Morris Philippines Manufacturing, Inc., another cigarette manufacturer, entered into an agreement to combine their business operations and contribute selected assets and liabilities to form a new company called PMFTC, Inc. As a result of this integrated business operations and considering that both Fortune Tobacco Corporation and Philip Morris Philippines Manufacturing, Inc. have the same line of business, processes common to both companies and function that became one were streamlined. On the part of FTC, it shall undertake a massive job cuts involving its employees originally doing the company's business functions affected by such streamlining. To cushion the effect of this integrated business operations on employees who will lose their jobs, Fortune Tobacco Corporation provided a separation package as follows: SITCEA 1. Special Separation Program (for employees qualified for compulsory/optional retirement) a. Early retirement pay under the existing Retirement Plan b. Additional gratuity pay of Twenty Seven (27) Days for every year of service c. Additional gratuity of P60,000.00 if interest in the program is communicated by December 6, 2010 Those employees who have rendered at least ten (10) years of service to Fortune Tobacco Corporation and are, at least fifty (50) years old are eligible to avail this program. 2. Redundate (those not qualified under the optional retirement) a. Thirty (30) Days pay for every year of Service. Employees whose functions have become redundant shall be involuntarily terminated. 3. Seasonal Workers a. Financial aid amounting to P8,000.00 given to those who have rendered less than 6 months work in a season but with a total of 6 months for all seasons worked b. Those who have rendered services for at least 6 months or more in a season: Daily rate x 26 days x number of seasons Or P8,000.00 whichever is higher Furthermore, Fortune Tobacco Corporation has a BIR approved Retirement Plan. IcTEaC 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 retirement benefits under the BIR approved Retirement Plan and/or 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). As to retirement benefits to be received by the affected employees under the BIR approved Retirement Plan, they are only exempt from income tax and consequently from the withholding tax provided that the two (2) important conditions under Section 32 (B) (6) (a) of the Tax Code of 1997, as amended, are satisfied, viz. : (1) that the official or employee had been in the service of the same employer for at least ten (10) years; and (2) he is at least fifty (50) years old at the time of retirement. 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) ESDcIA 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) Lastly, the separation from the service must be the direct result of actual retrenchment implemented and not due to the employee's qualification for compulsory/optional retirement program of the company. 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