BIR Ruling No. 441-11

November 11, 2011 BIR RULING NO. 441-11 Section 32 (B) (6) (b) NIRC; BIR Ruling No. DA-505-06; BIR Ruling No. 199-2011 Ms. Annie Sol A. Aquino 2677 Zamora St. Pasay City Madam : This refers to your letter, dated July 12, 2011, indorsed to this Office on August 17, 2011 by Revenue Region No. 8, Makati City, requesting a certificate of tax exemption on your separation benefits received as a consequence of separation from employment due to retrenchment. The facts, as shown from the documents submitted, are that Ms. Annie Sol A. Aquino ("Ms. Aquino") was an employee, from July 4, 1995 until August 1, 2011, of the Allegro Pacific (Phils.), Inc. ("Allegro, Inc."), a manufacturer and exporter of bags with business address at Multinational Village Road, Kaingin II, Bo. Ibayo, Paraaque City; that Allegro is a wholly owned subsidiary of Conair Corporation, a company based in New Jersey, U.S.A.; that Conair Corporation decided to sell Allegro's factory in the Philippines, thus, affecting the employment of several employees, including Ms. Aquino ; and that since the affected employees cannot be absorbed by the new owner or transferred to other areas within the organization, Allegro, Inc. decided to retrench the affected employees, effective August 1, 2011, with corresponding separation benefits. 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 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 nor initiated by him. DTIcSH The above-mentioned provision requires the presence of two (2) conditions in order that the 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. As noted, Ms. Aquino's separation from employment was due to the retrenchment effected by Allegro, Inc. Accordingly, where the employee is separated involuntarily from the service due to a cause beyond his control, the separation benefits received by him 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. 2-98, as amended. ( BIR Ruling No. DA-505-06 dated August 18, 2006) Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to Ms. Aquino . 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 to Ms. Aquino of her salaries and the payment of the 13th month pay and other benefits in excess of the Php30,000 threshold under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. ( BIR Ruling No. 199-2011 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue