BIR Ruling No. 426-13

November 14, 2013 BIR RULING NO. 426-13 Section 36 (B) (6) (b), NIRC of 1997, as amended; BIR Ruling No. 425-11; BIR Ruling No. 008-11 Y&R Philippines-MEC Media Communications 23/F Picadilly Star Building Block 19 Lot 3 4th Avenue corner 27th Street Fort Bonifacio Taguig City Attention: Manuel P. Quiogue Chief Executive Officer Bernadett J. Sanchez Chief Finance Officer Gentlemen : This refers to your letter dated 9 August 2012 requesting, on behalf Y&R Philippines-MEC Media Communications, confirmation of your opinion that the separation benefits of its employees who will be terminated due to redundancy are exempt from income tax and consequently from the withholding tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. It is represented that Y&R Philippines-MEC Media Communications with Taxpayer's Identification No. 000-346-929-000, is a corporation duly organized and existing under and in accordance with the laws of the Republic of the Philippines; that as a result of loss of business from Microsoft, Y&R Philippines-MEC Media Communications decided to terminate the services of its SEO Manager and Search Executive; that on July 30, 2012, Y&R Philippines-MEC Media Communications filed written notice of redundancy to the Department of Labor and Employment for the position of SEO Manager and Search Executive; that the said notice of redundancy cover two of its employee, Mr. Jeffrey Suck and Mr. Derek Ian C. Vicente; and that in compliance with the provisions of the Labor Code of the Philippines, Y&R Philippines-MEC Media Communications served the required 30 days' notice dated July 27, 2012 to Mr. Jeffrey Suck and Mr. Derek Ian C. Vicente. In reply, please be informed that Section 32 (B) (6) (b) of the Tax Code of 1997, as amended, provides: "SEC. 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this title: aHcDEC xxx xxx xxx (6) Retirement Benefits, Pensions, Gratuities, etc. xxx xxx xxx (b) 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." Based on the above provision, any amount to be received by an employee as a consequence of his separation from the service of his employer is exempt from income tax if the cause of his separation is death, sickness or other physical disability or for any cause beyond the control of the said official or employee. 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. (BIR Ruling No. 008-11 dated 19 January 2011) This Office has had several occasions to rule that the above-mentioned law requires the presence of two (2) conditions in order that the employee's 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. 008-11 dated 19 January 2011) In view thereof, this Office is of the opinion that since it appears that Mr. Jeffrey Suck and Mr. Derek Ian C. Vicente, employees of Y&R Philippines-MEC Media Communications has been separated from the service of the employer because of redundancy , a cause beyond the control of said employee, any amount to be received by him as a consequence of said separation is exempt from income tax and consequently from the withholding tax prescribed under Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 and 12-2001. Accordingly, no withholding tax shall be deducted from the separation benefit and the entire amount thereof shall be given to the entitled separated employee. (BIR Ruling No. 425-11 dated 4 November 2011) ESDHCa 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. (BIR Ruling No. 425-11 dated 4 November 2011) It is, however, understood that this exemption does not include the payment of the separated employee's salary 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. 425-11 dated 4 November 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 of Internal Revenue