BIR Ruling No. 454-14

November 10, 2014 BIR RULING NO. 454-14 Tax Code; Sec. 32 (B) (6) (b); BIR Ruling No. 199-2011 Kapunan Garcia & Castillo Law Offices Units 301 to 306, 32nd and Fifth Building 32nd Street corner 5th Avenue, Bonifacio Global City Taguig, Philippines Attention: Lorna Patajo Kapunan Assistant Manager Gentlemen : This refers to your letter dated 11 December 2012 requesting for a ruling on whether or not the separation benefits received by Mr. Elro Delos Reyes under the COCA-COLA BOTTLERS PHILIPPINES, INC. RETIREMENT PLAN shall be included in his gross income, and shall therefore not be exempt from income tax and consequently from withholding tax in light of the fact that he had earlier availed of separation benefits from San Miguel Retirement Plan that were already exempted from income tax. It is represented that Mr. Elro Delos Reyes, a regular employee of COCA-COLA BOTTLERS PHILIPPINES, INC. (CCBPI) holding position of Region OE Research and Study Manager, was involuntarily separated from employment with CCBPI on 31 December 2011 due to retrenchment. By reason of said involuntary separation, Mr. Elro Delos Reyes was paid separation benefits by the CCBPI-Retirement Plan. It is further represented that prior to joining CCBPI, Mr. Elro Delos Reyes was a regular employee of San Miguel Corporation, from which he was likewise involuntarily separated and was paid separation benefits by San Miguel Retirement Plan. The benefits paid by San Miguel Retirement Plan were not included in the gross income of Mr. Elro Delos Reyes and were exempted from income tax. 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 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. Section 32 (B) (6) (b) of the Tax Code of 1997, however, does not require that the separated employee must not have previously received separation benefits on account of his involuntary separation from his previous employment in order that he may be entitled to the exemption of his separation benefits. AaIDCS The above conditions are present in the case of Mr. Delos Reyes. As noted, Mr. Delos Reyes' separation from employment was due to the redundancy of his position in the CCBPI which is not of his own volition. 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. 199-2011 dated June 29, 2011) Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to Mr. Delos Reyes. It is, however, understood that this exemption does not include the payment to Mr. Delos Reyes of his salaries and 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) 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 and 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 income 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. Touching the issue on the challenged BIR Ruling No. 416-2012, you opined that the applicable Tax Code provision for Mr. Delos Reyes case is Section 32 (B) (6) (a) and not Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. We rule on the negative. As represented, Mr. Delos Reyes was involuntarily separated from his former employment (San Miguel Corporation) and he received separation pay in accordance with the provisions of the San Miguel Retirement Plan, this does not mean however, that what Mr. Delos Reyes received was a RETIREMENT BENEFIT because of the fact that he did not RETIRE from CCBPI but was INVOLUNTARILY SEPARATED. Hence, the Bureau did not commit any error in using Section 32 (B) (6) (a) of the Tax Code of 1997, as amended as a basis for our opinion in BIR Ruling No. 416-2012. This above-mentioned 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 set forth therein. 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 as null and void. cASIED Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue