BIR Ruling No. 365-14

September 23, 2014 BIR RULING NO. 365-14 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 Suzuki Philippines, Incorporated Head Office: 126 Progress Avenue, Carmelray Industrial Park I, Carmeltown, Canlubang, Calamba City, Laguna 4028 Pasig Branch: Danny Floro Street, Bagong Ilog, Pasig City Attention: Ms. Catalina T. Calderon Managing Director/Treasurer Gentlemen : This refers to your letter dated April 1, 2013, requesting exemption from withholding tax of the separation pay to be received by the employees of SUZUKI PHILIPPINES, INCORPORATED ("The Company" for brevity) due to redundancy pursuant to Section 32 (B) (6) (b) of the National Internal Revenue Code (NIRC) of 1997, as amended. It is represented that SUZUKI PHILIPPINES, INCORPORATED, is a domestic corporation duly registered and existing under the laws of the Philippines; that as a result of reorganization within The Company , which includes the construction and operation of its new plant facility in 2012, it has to ensure that it will be operating at optimum efficiency and effectiveness, particularly in light of current market reality that there is unstable market demand; that The Company had adopted effective measures brought about by the modernized facility that increased efficiency; and that The Company's top management is consistently studying the manpower complement to eliminate work duplication and keep abreast with the market demand during this time, thus, requiring to permanently terminate the following employees, to wit: Name of Employee Address Position Velasquez, Gregorio V. 43 Rafael St. Bagong Ilog, Pasig City Final Inspector Montemayor, Ferdinand M. 21 Rufina Homes, Maybunga, Pasig City Material Control Manager Joaquin Jr., Angel R. 1304 F. Manolo St., Batis, San Juan Team Leader-Welding Espiritu, Isagani D. 2074 Nuestra Senora de Guadalupe, PPMC Warehouseman Makati City Importante, Richard C. Blk. 82 Lot 38, Mabuhay City, Cabuyao, General Services Specialist Laguna Nuestro, Ricardo R. B-10 L-9, Yellowbell, Duraville Homes, Team Leader Material Ampid, San Mateo, Rizal Control Catibog, Jr., Lorenzo M. Unit 141 Man. Executive Subd. G. Area Leader Production Enriquez St. Barangay Vergara, Eng'g. Mandaluyong City Castro, Pepito A. 308 P. Tobias St. UE Village, San Isidro, Senior Manager-Supply Cainta, Rizal Chain Patricio, Edwin T. Unit I, 2-D, Vicencio Street, San Juan, Information Systems Metro Manila Manager Hontiveros, Manolo C. 41 R. Hernandez Street, San Joaquin, Manager-After Sales Pasig City Service and that on April 5, 2013, SUZUKI PHILIPPINES, INCORPORATED filed with the Department of Labor and Employment (DOLE) a Notice of Termination due to Redundancy of the aforementioned employees and that Notices of Termination were served on April 16, 2013, informing them that the termination takes effect on May 15, 2013. 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) cAHIaE 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 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 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) 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