BIR Ruling No. 404-13

November 7, 2013 BIR RULING NO. 404-13 Sec. 32 (B) (6) (b) of the Tax Code of 1997, as amended; BIR Ruling No. 009-11; BIR Ruling No. 199-11; BIR Ruling No. 555-12 Mactan Enerzone Corporation Aboitiz Corporate Center, Gov. M. Cuenco Avenue, Banilad, Cebu City Attention: Mr. Dante T. Pollescas Senior Vice President & COO Gentlemen : This refers to your letter dated February 4, 2013, requesting in behalf of MACTAN ENERZONE CORPORATION (MEZ for brevity) ,for the issuance of a Confirmatory Ruling that the separation benefits to be received by employees due to implementation of a redundancy program are exempt from taxes and consequently from withholding tax. SCEHaD It is represented that MEZ, with Taxpayer's Identification No. (TIN) 250-327-890-000, is a corporation duly organized and existing under the laws of the Philippines with principal office address at Aboitiz Corporate Center, Gov. M. Cuenco Ave.,Banilad, Cebu City, and is primarily engaged in power distribution. It is also represented that based on the company-wide restructuring of its personnel, certain positions were considered as feasible for merging with other existing positions while others were deemed operational unnecessary; that likewise, the restructuring is apt to properly put in place the right number and the qualified people in the organization, resulting to existing positions be taken out in the Company's plantilla. MEZ, in exercise of management prerogative, decided to retrench One (1) of its employees and declared his position redundant; that the affected employee was notified by MEZ Management on December 13, 2012, namely: 1. Herbert B. Cabatingan and that a Notice of Retrenchment was sent to the Department of Labor and Employment (DOLE) which resulted in the Establishment Termination Report duly received by DOLE-Region VII on December 19, 2012. 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. Accordingly, this Office hereby holds that any and all amounts to be received by your employee affected by the retrenchment program 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. The payment of salaries, however, is subject to income tax and consequently to withholding tax. (BIR Ruling No. 009-11 dated January 19, 2011) ASTDCH 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) Lastly, the separation from the service must be the direct result of actual retrenchment implemented and not due to the employee'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