BIR Ruling No. 366-14

September 23, 2014 BIR RULING NO. 366-14 Section 32 (B) (6) (b), 1997 NIRC; BIR Ruling No. 555-2012; BIR Ruling No. 199-2011 Allegro Pacific Phils., Inc. Multinational Village Rd., Kaingin II Brgy. Sto. Nio, Paraaque City Attention: Ms. Felicidad P. Catbagan Finance & Gen. Administration, Senior Manager Gentlemen : This refers to your letter dated March 14, 2013, as indorsed by the Regional Director of Revenue Region No. 9, Makati City, requesting in effect, for a confirmatory ruling that the separation benefits to be received by one (1) of your employees on account of your company's existing retrenchment program is exempt from tax under Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. Documents submitted show that Allegro Pacific (Phils), Inc. (APPI for brevity) with TIN 000-416-513-000 is a corporation duly organized and existing under the laws of the Philippines under SEC Reg. No. 164047. The management of APPI was compelled to reduce its manpower complement to help avoid incurring further losses and thus affected Romeo E. Azarcon, your Company's MIS (Information Technology) Manager. The separation package for the above-named employee will be a great help to lessen the impact of the latter's severance with APPI. The Establishment Employment Report submitted by APPI was duly received by DOLE-NCR MUNTAPARLAS Field Office on November 12, 2013, and that the Notice of Termination dated February 2, 2013 due to APPI's reorganization/downsizing was duly received by the concerned employee. In reply, please be informed that 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 pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. The phrase "for any cause beyond the control of the 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. The 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 heir as a consequence of such separation. EIAaDC Accordingly, this Office hereby holds that any and all amounts to be received by Mr. Romeo E. Azarcon, as a consequence of the implementation of APPI's retrenchment program is 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 (RR) No. 2-98, as amended. The payment of salaries, however, is subject to income tax and consequently to withholding tax. Moreover, pursuant to Section 2.78.1 (A) (7) of RR 2-98, as amended, 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. 199-11 dated June 29, 2011) It is, however, understood that this exemption does not include the payment of the separated employee's 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. 555-12 dated September 6, 2012) It is to be noted that the separation of the afore-named employee from the service must be the direct result of APPI's retrenchment program and not due to Mr. Romeo E. Azarcon's qualification to the 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 as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue