BIR Ruling No. 425-11

November 4, 2011 BIR RULING NO. 425-11 Sec. 32 (B) (6) (b) and 79; BIR Ruling No. 199-2011; BIR Ruling No. DA-594-04; BIR Ruling No. [SB-(004) 033-10]; BIR Ruling No. 163-92; BIR Ruling No. DA-350-97; BIR Ruling No. DA-222-07 Chato & Vinzons-Chato Law Offices 8th Floor, Strata 2000 F. Ortigas Jr. Road Ortigas Center, Pasig City Attention: Esther R. Ibaez Gentlemen : This refers to your letter dated August 23, 2010 requesting in behalf of your client, PROBE PRODUCTIONS, INC. for the confirmation of your opinion that any and all amounts, benefits and payments to be received by the separated employees from the company on the ground of cessation of business is exempted from taxation, in accordance with Section 32 (B) (6) (b) of the 1997 Tax Code, as amended. It is represented that on June 1, 2010, PROBE PRODUCTIONS, INC. filed a written notice to the Department of Labor and Employment that it has intended to cease operations after June 30, 2010 which resulted to the termination from employment of the twenty-six (26) of its employees. The names, positions and dates of employment are as follows. Name of Employee Position Date of Employment 1) Abunales, Daniel Producer March 7, 2008 2) Aceron, Rodrigo H. Driver/Soundman November 27, 1996 3) Alindogan, Denor C. Crew Supervisor October 24, 1998 4) Alindogan, Juan Driver/Soundman June 1, 2004 5) Aquino, Jennifer Production Assistant April 22, 2009 6) Banayat, Ramilo C. Technician May 1, 2004 7) Cansino, Elsie Jean Production Assistant May 25, 2009 8) Castil, Bernardo R. Cameraman February 26, 1996 9) Catubay, Jonathan M. Cameraman August 10, 1993 10) Catubay, Lea T. Bookkeeper January 12, 1994 11) Cruz, Alicia S. Technical Supervisor December 1, 1999 12) Cruz, Maria Concepcion General Manager November 16, 2002 13) Cruz, Jasmin DG Junior Assistant December 8, 1997 14) Del Rosario, Jose Bernie III Producer November 16, 2007 15) Esmaquel, Paterno II Production Assistant May 6, 2008 16) Fernando, Maricris R. Marketing Manager May 23, 2002 17) Gecala, Fortunato Alex Utilityman September 16, 2001 18) Ladra, Desiderio V. Soundman April 1, 1994 19) Ladra, Guillermo V. Cameraman May 24, 1990 20) Laurio, Marilyn Accounting Supervisor May 23, 2002 21) Manalaysay, Lilibeth G. Personnel Officer April 19, 1999 22) Mascarinas, Fernan Production Assistant September 1, 2008 23) Sanchez, Hera Angelica Supervising Producer July 23, 2002 24) Sodipe, Lucille Production Coordinator October 1, 2008 25) Lago, Zanneth Producer July 1, 2004 26) Vinoya, Judy Joanne Video Librarian March 1, 2004 In support of its request, you have submitted the following documents: TcDAHS 1) Sworn certification executed by Cecilia L. Lazaro, President of PROBE PRODUCTIONS, INC. attesting to the fact that the separation from employment of its employees was due to cessation of operations or a cause beyond the control of the said employees; 2) Copies certified by the Department of Labor and Employment (DOLE): a) Establishment Termination Report; b) List of Permanently Terminated Workers Due to Cease Operation of Business; c) Written notice to the DOLE at least one (1) month before the intended date of resignation/separation; 3) Verification/Certification of Non-forum Shopping; and 4) Authority to file, process, and follow-up. In reply, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, 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. The phrase "for any cause beyond the control of 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 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) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. (BIR Ruling No. [SB-(004) 033-10] dated June 1, 2010 citing BIR Ruling Nos. 163-92 dated May 25, 1992; DA-350-97 dated October 23, 1997; DA-222-07 dated April 12, 2007) ACDIcS In view thereof, this Office is of the opinion that since it appears that the employees of PROBE PRODUCTIONS, INC. enumerated herein have proven to have been separated from the service of the employer because of cessation of operation of PROBE PRODUCTIONS, INC., a cause beyond the control of the said employees, hence, said cause was beyond their control. Therefore, the amount received by the above-named taxpayers or by their heirs from their employer, PROBE PRODUCTIONS, INC., as a consequence of separation from the service of the employer regardless of age or length of service, shall be excluded from the gross income and shall be exempt from taxation pursuant to Section 32 (B) (6) (b) of the 1997 Tax Code, as amended. Likewise, the separation benefits shall be exempt from withholding tax as prescribed by Section 79 of the 1997 Tax Code, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 and 12-2001. Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the entitled separated employee. 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 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. 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 Php30,000.00 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 citing BIR Ruling No. DA-594-04 dated November 23, 2004) This ruling shall continue to be valid unless revoked by this Office for violation of any provisions of Revenue Memorandum Order (RMO) No. 26-2011 and other applicable rules and regulations of the BIR, and the terms and conditions herein set forth. ECaITc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue