BIR Ruling No. 455-12

July 10, 2012 BIR RULING NO. 455-12 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 Grand Cargo and Warehousing Services, Inc. 24 Fortune Avenue Brgy. Fortune, Marikina City Attention: Manolo Chua President Gentlemen : This refers to your letter dated December 5, 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 Grand Cargo and Warehousing Services, Inc. (Grand Cargo) is a domestic corporation primarily engaged in the storage and warehousing services for its affiliates. As a consequence of downward business demand for cargo and warehousing services, reduction of its workload resulted. Grand Cargo was forced to trim down its operations and job cuts followed. To cushion the effect on employees who will lose their jobs, Grand Cargo provided a separation package as follows: 1. Special Separation Program (for employees who are 60 years old or upon the completion of 30 years of service; or who are at least 55 years old and have rendered 10 years continuous service or 20 years of service to the company) a. Retirement benefit under the existing Retirement Plan b. Additional gratuity pay of Twenty Seven (27) Days for every year of service DAaIHT c. Additional gratuity pay of P60,000.00 if interest in the program is communicated by December 6, 2010 2. Employees who have been with the company for less than twenty (20) years and are less than 55 years old (those not qualified under 1 above) a. Thirty (30) Days pay for every year of Service. Furthermore, Grand Cargo 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) 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 are 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. However, other benefits provided for in the Retirement Plan other than retirement benefits shall not be covered by the tax exemption unless they are also expressly exempt from tax pursuant to the other provisions of the Tax Code. SEHTAC 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. 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