BIR Ruling No. 470-12

July 17, 2012 BIR RULING NO. 470-12 Sections 32 (B) (6) (b) and 79 of the Tax Code of 1997, as amended; BIR Ruling No. 510-2011; BIR Ruling No. 497-2011; BIR Ruling No. 481-2011 PODD Corp. Suite 2A-E Pacific Square Bldg., F. Cabahug St. Mabolo, Cebu City 6000 Attention: Maria Christine C. Rom President Gentlemen : This refers to your letter dated January 13, 2012 endorsed by the BIR-Revenue Region No. 13 (Cebu City), requesting for the exemption from withholding tax of the separation pay to be received by the employees of PODD CORP. as a result of their separation from employment due to retrenchment pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. LibLex It is represented that PODD CORP., a corporation organized and existing under the laws of the Philippines, filed a written notice to the Department of Labor and Employment that it has terminated the employment of eight (8) of its employees due to economic reasons such as lack of market or slump in demand. The names, positions and effective date of termination are as follows: Name of Employee Occupation/Skills Effective Date of Termination 1) Fritz C. Ocampo Information System February 10, 2012 Officer 2) Henley V. Tabal Project Coordinator February 10, 2012 3) Joebert Jude A. Graphic Artist February 10, 2012 Cimafranca 4) Francis P. Farin 3D Designer February 10, 2012 5) Kareen Kristeen V. Copywriter Team Lead February 12, 2012 Bughaw 6) Vanessa V. Mercader Account Manager February 11, 2012 7) William S. Rea Development Manager February 13, 2012 8) Johanna L. Wang QA Specialist January 14, 2011 In support of its request, you have completely submitted on May 11, 2012 the following documents: 1) Sworn Corporate Undertaking executed by Maria Christine C. Rom, President of PODD CORP. attesting to the fact that the separation from employment of its employees was due to cessation of operations or a cause beyond the control of the said employees; 2) Copies certified by the Department of Labor and Employment (DOLE): a) Establishment Termination Report; b) List of Permanently Terminated Workers Due to Cease Operation of Business; c) Written notice to the DOLE at least one (1) month before the intended date of resignation/separation; aEAIDH 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 the 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 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 a consequence of such separation. In view thereof, considering that the employees of PODD CORP. enumerated herein, have been separated from the service of the employer due to retrenchment, a cause beyond the control of said employees, the amount received by the above-named taxpayers or by their heirs from their employer, PODD CORP., as a consequence of separation from the service of the employer regardless of age or length of service, shall be excluded from the gross income and shall be exempt from taxation pursuant to Section 32 (B) (6) (b) of the 1997 Tax Code, as amended. Likewise, the separation benefits shall be exempt from withholding tax as prescribed by Section 79 of the 1997 Tax Code, as implemented by Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 and 12-2001. Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the entitled separated employee. 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. CDISAc 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. 510-2011 dated December 20, 2011; BIR Ruling No. 497-2011 dated December 15, 2011; and BIR Ruling No. 481-2011 dated December 5, 2011 ) 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