BIR Ruling No. 364-14

September 22, 2014 BIR RULING NO. 364-14 Section 32 (B) (6) (b), NIRC of 1997, as amended; BIR Ruling No. 199-2011; BIR Ruling No. 084-2010; BIR Ruling No. 131-2010; BIR Ruling No. 021-2010 WPP Marketing Communications, Inc. (Formerly: J. Walter Thompson Phils., Inc.) 7th Floor, BDO Tower, 8751 Paseo de Roxas, Salcedo Village, 1227 Makati City Attention: Joseph Frederick S. Sulit Director, Finance, Admin & IT Ma. Melissa Ramonita J. Crucillo Chief Executive Officer Gentlemen : This refers to your letter dated July 29, 2013, requesting exemption from withholding tax of the separation pay to be received by the employees of WPP MARKETING COMMUNICATIONS, INC. due to Retrenchment pursuant to Section 32 (B) (6) (b) of the National Internal Revenue Code (NIRC) of 1997, as amended. It is represented that WPP MARKETING COMMUNICATIONS, INC. is a domestic corporation duly registered and existing under the laws of the Philippines, with office and principal place of business at 7th Floor, BDO Tower, 8751 Paseo de Roxas, Salcedo Village, Makati City and with Taxpayer's Identification No. (TIN) 000-346-929-000; that it is constrained by present business conditions to effect a downsizing program to prevent further serious and substantial losses in the immediate future; that the depressed market conditions and the centralization of activities for Nokia, Unilever and Ford have caused substantial decrease in revenue for the company; that management had tried to forestall or prevent the expected losses by adopting a serious cost cutting policies to no avail; that the expected losses in income in the coming year/s are too substantial to be offset by the cost cutting measures that the company have implemented; that as a consequence, certain existing positions were taken out in the company's plantilla leading to a workforce reduction, thus, requiring to permanently terminate the services of the following employees effective April 30, 2013, to wit: Name of Employee TIN No. Peter Robert F. Espina 112-825-044 Miracle A. Payongayong 201-978-858 that WPP MARKETING COMMUNICATIONS, INC. has duly filed with the Department of Labor and Employment (DOLE) the Notices of Termination due to Retrenchment of the aforementioned employees and that said Notices of Termination were duly served informing them of its effective date. In reply, please be informed that pursuant to Section 32 (B) (6) (b) of the National Internal Revenue Code (NIRC) 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) that 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 above-named employees due to retrenchment as a result of their separation from the service are exempt from income tax and consequently from the withholding tax prescribed under Section 79, Chapter XIII, Title II of the National Internal Revenue Code (NIRC) of 1997, as amended, as implemented by Revenue Regulations (RR) 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 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 a sick leave to be able to avail of said leave credits. (BIR Ruling No. 199-2011 dated June 29, 2011) IcTEAD 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 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 Bureau of Internal Revenue