BIR Ruling No. 435-11

November 9, 2011 BIR RULING NO. 435-11 Section 32 (B) (6) (b) Tax Code of 1997; BIR Ruling DA-068-00; BIR Ruling No. 069-98; BIR Ruling No. DA-594-04 Amalgamated Specialties Corporation Km. 21 West Service Road South Super Highway Muntinlupa City Attention: Ma. Esmeralda G. Alcaraz Accounting Manager Gentlemen : This refers to your letter dated July 29, 2011 requesting for tax exemption on the separation benefits received by the employees of Amalgamated Specialties Corporation ("AMSPEC") on account of their separation from employment due to retrenchment. The documents submitted show that AMSPEC is a manufacturing company engaged in the production of pencils, carbon paper and other traditional office and school supplies; that recent developments in AMSPEC's operations, like the withdrawal of Mongol pencils from its product line, has caused significant revenue losses to the company, amplified by the substantial decrease in the sales of company products, slump in demand, and the rising costs of production of the current brand of pencil which the company is producing and selling in the market; that in order to address the economic condition of the company, AMSPEC implemented temporary cessation of operation of the pencil and carbon paper divisions, which turned out to be futile, and the company suffered and continues to suffer losses; that in order to avert further losses, the company was constrained to indefinitely cease operations of the pencil and carbon paper divisions and reduce the number of the production workers at the company; and that the retrenched employees, whose names are enumerated in Annex "A" hereof, were given their corresponding separation pay in accordance with the provisions of the existing labor laws and regulations. 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. EHSTDA 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 AMSPEC's employees was due to retrenchment, a cause which is beyond their control, any and all amounts received by them as a result thereof are exempt from income tax 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 the retrenched employees 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 their 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) Finally, the tax exemption does not include the company's payment of the retrenched employees' 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 ANNEX A AMALGAMATED SPECIALTIES CORPORATION RETRENCHED EMPLOYEES FINAL EFFECTIVE JUNE 15, 2011 ID No. Name Birthdate Date Yrs Gender Daily Vesting Labor Separation BPI Final Hired Rate (retirement Code Benefits Computation Computation plan) (A) (B) (C) 1 AM0306 Balderas, Alastaire C. 19-Jul-80 22-Jan-99 12 M 559.50 - 84,764.28 84,764.28 84,764.28 84,764.28 ok 2 AM0176 Cubilla, Jaime M. 10-Jan-68 4-Mar-92 19 M 683.00 70,292.08 163,834.63 163,834.63 163,834.63 163,834.63 ok 3 AM0050 Esquivel, Raul Y. 14-Aug-62 1-Jun-89 22 M 705.50 369,917.27 195,952.68 369,917.27 369,916.36 369,916.36 ok 4 AM0040 De Luna, Corazon M. 01-Sep-62 27-Mar-87 24 F 718.00 410,696.00 217,554.00 410,696.00 410,694.24 410,894.24 ok 5 AM0107 Nale, Edgardo L. 28-Apr-57 1-Sep-82 29 M 736.70 509,182.62 269,724.36 509,182.62 509,181.42 509,181.42 ok 6 AM0041 De Tobio, Alicia I. 03-May-59 25-May-82 29 F 736.70 509,182.62 269,724.36 509,182.62 509,181.42 509,181.42 ok 7 AM0069 Gatchalian, Lorna V. 15-Jul-55 1-Apr-82 29 F 736.70 509,182.62 269,724.36 509,182.62 509,181.42 509,181.42 ok 8 AM0085 Las Pias, Domingo L. 04-Feb-62 1-Jun-81 30 M 736.70 526,740.64 279,025.20 526,740.64 526,739.40 526,739.40 ok 9 AM0119 Reyes, Rosario O. 07-Oct-58 11-Dec-80 30 F 736.70 526,740.64 279,025.20 526,740.64 544,298.52 544,297.38 ok 10 AM0083 Lacdao, Charito M. 22-May-54 1-Mar-80 31 M 737.06 544,564.64 288,466.94 544,564.64 544,563.36 544,563.36 ok 11 AM0011 Alvela, Pablito A. 13-Aug-58 1-Mar-76 35 M 740.78 617,934.15 327,332.25 617,934.15 617,932.70 617,932.70 ok 4,594,433.29 2,645,128.25 4,772,740.11 4,790,287.75 4,790,286.61 1 AM0255 Evaristo, Marilyn P. 19-Jul-75 29-Nov-93 19 F 639.00 65,763.75 153,280.13 153,280.13 145,212.75 145,212.75 ok 2 AM0211 Boral, Mirasol B. 10-Apr-68 26-Oct-92 19 F 661.00 68,027.92 158,557.38 158,557.38 158,557.38 158,557.38 ok 3 AM0216 Manuel, Jacinto, Jr., T. 05-Jul-65 18-Oct-92 19 M 661.00 68,027.92 158,557.38 158,557.38 158,557.38 158,557.38 ok 4 AM0208 Fundador, Arnold F. 01-Mar-65 28-Sep-92 19 M 661.00 68,027.92 158,557.38 158,557.38 158,557.38 158,557.38 ok 5 AM0210 De Guzman, Marilyn A. 22-Oct-68 21-Sep-92 19 F 661.00 68,027.92 158,557.38 158,557.38 158,557.38 158,557.38 ok 6 AM0192 Bautista, Jose S. 19-Jun-66 8-Jun-92 19 M 683.00 70,292.08 163,834.63 163,834.63 163,834.63 163,834.63 ok 7 AM0181 Satimbre, Polly S. 22-Jun-71 12-Feb-92 19 M 683.00 70,292.08 163,834.63 163,834.63 163,834.63 163,834.63 ok 8 AM0190 Davis, Joel B. 11-May-67 8-Feb-92 19 M 683.00 70,292.08 163,834.63 163,834.63 163,834.63 163,834.63 ok 9 AM0172 Cabigting, Alex S. 31-Jul-66 4-Sep-91 20 M 693.00 330,330.00 174,982.50 330,330.00 330,330.00 330,330.00 ok 10 AM0096 Magallanes, Edgar L. 03-Dec-63 13-Mar-89 22 M 705.50 369,917.27 195,952.68 369,917.27 369,916.36 369,916.36 ok 11 AM0022 Bitara, Carlos, Jr., B. 07-Jun-60 30-Oct-82 29 M 736.70 509,182.62 269,724.36 509,182.62 509,181.42 509,181.42 ok 12 AM0087 Lavarez, Reynaldo B. 20-Nov-63 1-Mar-82 29 M 736.70 509,182.62 269,724.36 509,182.62 509,181.42 509,181.42 ok 2,267,364.18 2,189,397.40 2,997,626.01 2,989,555.36 2,989,555.36 Monthly 1 AM0007 Alpas, Adelma O. 10-Aug-58 7-Sep-81 30 F 19,200.00 543,683.17 288,000.00 543,683.17 543,681.60 543,681.60 ok 2 AM0009 Alvea, Armando L. 08-Apr-58 18-Apr-90 21 M 32,500.00 644,207.92 341,250.00 644,207.92 644,208.18 644,208.18 ok 3 AM0187 Legaspi, Orlando B. 15-Oct-72 24-Feb-92 19 M 17,700.00 72,143.56 168,150.00 168,150.00 168,150.00 168,150.00 ok 4 AM0078 Reyes, Marissa I. 23-Sep-65 15-Oct-90 21 F 17,000.00 320,924.09 178,500.00 320,924.09 350,847.42 320,924.09 1,580,958.75 975,900.00 1,676,965.18 1,706,887.20 1,676,963.87 TOTAL 8,442,756.21 5,810,425.65 9,447,331.30 9,486,730.31 9,456,805.84 ========= ========= ======== ========= ========= Check Breakdown: Date Check No. Amount 7/1/2011 75904 330,330.00 7/5/2011 76066 8,612,101.79 7/12/2011 944707 544,297.38 returned to BPI (350,847.42) pending 320,924.09 9,456,805.84 =========== Notes: A. Applicable retirement plan vesting under a voluntary/early retirement. Employees with 15 to 19 years in service are vested at 5 days per year of service and those with at least 20 years in service are vested at 22 days per year of service. B. Labor code provision on retrenchement of 1/2 month per year of service was followed. Salary of daily paid employees were grossed up to get monthly salary. C. The computed separation benefits is the higher amount between A and B per our legal advice. Prepared by: (Sgd.) Dennis R. Llarena