BIR Ruling No. 434-12

June 25, 2012 BIR RULING NO. 434-12 Section 32 (B) (6) (b) of the Tax Code, as amended; BIR Ruling No. 199-11; BIR Ruling No. 084-10; BIR Ruling No. 131-10; BIR Ruling No. 021-10 Silahis Marketing Corporation 5th floor COMFOODS Bldg. Sen. Gil Puyat Ave. cor. Chino Roces Ave. Makati City Attention: Atty. Narciso P. Nario Corporate Secretary Gentlemen : This refers to your letter dated September 19, 2011 requesting for confirmation of opinion that the separation benefits and other benefits of your retrenched employees are exempt from income tax and consequently from withholding tax. It is represented that Silahis Marketing Corporation is a domestic corporation primarily engaged to carry on a general mercantile and commercial business of buying, acquiring, holding, selling at retail or wholesale, indenting, importing and exporting, bartering or otherwise disposing of and dealing in any goods, wares, merchandise and commodities of all kinds, and products, natural or artificial, of the Philippines or other countries, which are or may become articles of commerce; that the main reason for retrenchment of workers is company reorganization/downsizing due to massive shortfall of sales resulting to continued operating losses; that effective August 31, 2011, Silahis Marketing Corporation shall permanently terminate twenty seven (27) of its employees. Furthermore, Silahis Marketing Corporation has a BIR approved Retirement Plan. In reply, 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 the said official or employee shall not be included in the gross income and shall be exempt from taxation under Title II of the same Code. (BIR Ruling No. 084-10 dated October 6, 2010) 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. 131-10 dated December 1, 2010). TaDSHC Accordingly, the retirement benefits under the BIR approved Retirement Plan and/or the separation pay to be received by the employees deemed as occupying redundant positions as a result of their separation from the service 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. (BIR Ruling No. 021-10 dated July 30, 2010). As to retirement benefits to be received by the affected employees under the BIR approved Retirement Plan, they are only exempt from income tax and consequently from the withholding tax provided that the two (2) important conditions under Section 32 (B) (6) (a) of the Tax Code of 1997, as amended re satisfied, viz. : (1) that the official or employee had been in the service of the same employer for at least ten (10) years; and (2) he is at least fifty (50) years old at the time of retirement. Other benefits provided for in the Retirement Plan shall not be covered by exemption unless they are expressly exempt from tax pursuant to the other provisions of the Tax Code. 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. 199-2011 dated June 29, 2011) 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) Lastly, the separation from the service must be the direct result of actual retrenchment implemented and not due to the employee's qualification for compulsory/optional retirement program of the company. IcHEaA 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