BIR Ruling No. 384-11

October 20, 2011 BIR RULING NO. 384-11 Tax Code of 1997, as amended, Section 32 (B) (6) (b); BIR Ruling No. DA-068-00; BIR Ruling No. 069-98; BIR Ruling No. DA-594-04 Del Monte Fresh Produce (Philippines), Inc. Powerhouse Building, J.P. Laurel Ave. Bo. Pampanga, Lanang Davao City Attention: Cirila D. Canseco Manager-Human Resources Gentlemen : This refers to your letter dated November 10, 2010, indorsed to this Office by Revenue Region No. 9 on February 7, 2011, requesting on behalf of Ms. Cecilia Denis A. Marrero for the issuance of a Certificate of Tax Exemption on her separation benefits due to physical disability. Documents submitted show that Ms. Marrero was employed by Del Monte Fresh Produce (Philippines), Inc. as a Senior Director for Finance; that during her employment, Ms. Marrero was diagnosed with Motor Neuron Disease (Amyotrophic Lateral Sclerosis), a disease which causes progressive muscle weakness and atrophy that disallow the patient to move her limbs properly and with coordination, thereby causing the patient difficulty in performing regular and ordinary activities; that the disease has been found acute and requires immediate and constant medical intervention; and that based on the medical findings, continued employment of Ms. Marrero is prejudicial to her life, hence, the company decided to end her employment so as not to aggravate her illness. In reply thereto, 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 said official or employee is exempt from taxes regardless of age or length of service. The above-mentioned law requires the presence of these two conditions in order that the employee benefits may be granted tax exemption: (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. Since the separation from service of Ms. Marrero was due to sickness/physical disability, any and all amounts received by her as a result thereof are exempt from all taxes and consequently from the withholding tax prescribed by Section 79 of the Tax Code of 1997 and as implemented by Revenue Regulations No. 6-82, as amended. (BIR Ruling DA-068-00, dated February 2, 2000). Moreover, pursuant to Sections 2.78.1 (A) (3) and (7) of RR No. 2-98, as amended, the terminal pay, i.e., commutation and payment of monetized unused vacation leave credits of Ms. Marrero not exceeding ten (10) days during the year, is not subject to income tax and consequently to the withholding tax. Conversely, the cash equivalent of her 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 sick leave to be able to avail of said leave credits. (BIR Ruling No. DA-594-04 dated November 23, 2004) TAaCED Finally, the tax exemption does not include the company's payment of Ms. Marrero's salary. (BIR Ruling No. 069-98 dated October 6, 1998). 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