BIR Ruling No. 463-11

November 24, 2011 BIR RULING NO. 463-11 Secs. 32 (B) (6) (b) and 79; BIR Ruling No. 011-92; BIR Ruling No. 022-01; BIR Ruling No. 199-11 Ma. Theresa Trinos Banaticla Brgy. Banlic, Cabuyao, Laguna Madam : This refers to your letter dated September 23, 2010 requesting for tax exemption on the separation benefits of your husband, Mr. Conrado L. Banaticla, Jr. from his employer, Asian Transmission Corporation. Document submitted to this Office show that your husband, Mr. Conrado L. Banaticla, Jr. is an employee of Asian Transmission Corporation since October 1990 as a Machinist; that he was diagnosed to be suffering from uncontrolled hypertension, diabetes mellitus and severe depression by his attending physician, Dr. Del Fuerte, and as certified by Dr. Rey E. Murillo, both of the Calamba Doctors' Hospital; that due to his sickness, he is physically disabled to perform his duties as Machinist; that he was recommended by the company physician, Dr. Reynerio Garcia, for separation from the company, Asian Transmission Corporation, and that effective October 30, 2010, he was separated from his employer due to his illness/physical incapacity to perform his duties. 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 from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee is exempt from income tax 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 or initiated by him. 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 consequence of such separation. (BIR Ruling No. 022-01 dated June 13, 2011) AcCTaD Moreover, Section 2.78.1 (A) (3) (a) (b) and (A) (7) of Revenue Regulations (RR) No. 2-98, as amended by RR Nos. 5-2011 and 10-2000, provides: (Emphasis supplied) "Sec. 2.78.1. Withholding of Income Tax on Compensation Income. (A) . . . (3) Facilities and privileges of relatively small value. xxx xxx xxx The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees: (a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year; (b) Monetized value of vacation and sick leave credits paid to government officials and employees; xxx xxx xxx (7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which is paid notwithstanding his absence from work constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which are paid to PRIVATE employees during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES SHALL NOT BE SUBJECT TO INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX." Thus, pursuant to the above-quoted provision, 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 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. AEIHCS In view thereof, this Office is of the opinion that since it appears that Mr. Conrado L. Banaticla, Jr., could not continue to work because of his medical condition, his separation from work may be considered involuntary, hence, beyond his control. It is but proper that any and all amount which he will receive from his employer, Asian Transmission Corporation, as a result of his separation from service due to physical disability are exempt from income tax and consequently from 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 by Revenue Regulations Nos. 6-2001 and 12-2001. (BIR Ruling No. 001-92 dated January 2, 1992) However, other income received prior to separation shall be subject to tax pursuant to Section 24 of the same Code. 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