BIR Ruling No. 478-14

December 3, 2014 BIR RULING NO. 478-14 Section 32 (B) (6) (b) of the Tax Code, as amended; BIR Ruling No. 416-12 Sycip Salazar Hernandez & Gatmaitan Attorneys-at-Law SyCip Law Centre 105 Paseo De Roxas, Makati City Attention: Leslie C. Dy Partner Gentlemen : This refers to your letter dated February 17, 2012, requesting for confirmation of opinion in behalf of Ford Philippines Machining Company (FPMC), 1 that the separation benefits to be received by employees involuntarily terminated by reason of redundancy is exempt from income tax and consequently from withholding tax. Documents submitted disclosed that FPMC with TIN 244-190-328-000 is a foreign company organized and existing under the laws of Delaware, U.S.A. was issued a License to Transact Business in the Philippines under Securities and Exchange Commission (SEC) Registration No. FS200603718 to establish a branch office in the Philippines to engaged in, conduct and operate the business of manufacturing, processing, exporting, importing, buying and selling at wholesale, vehicle parts and components and other similar products and components of all kinds and make, as well as performing and providing all types of services activities in connection thereto; that it recently ended the production of one of its models, Mazda 3 and this caused a significant drop in the total production volume, FPMC, in order to improve cost and operational efficiency of its manufacturing operations and to enable it to compete and continue to be viable in the future, implemented a restructuring within its manufacturing operations, as a result, it shall permanently terminate Joebeth Herrera Kaquiva effective February 15, 2012; and that on January 13, 2012, FPMC notified DOLE ROIV-A Laguna Provincial Office of its intention for the reduction of workforce. 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. 416-2012 dated June 25, 2012) TSIDaH 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. 416-2012 dated June 25, 2012) Accordingly, the separation pay to be received by the retrenched employees as a result of their separation from the service is 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. 416-2012 dated June 25, 2012) 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. 416-2012 dated June 25, 2012) It is, however, understood that this exemption does not include the payment of the separated employee's 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. 416-2012 dated June 25, 2012) 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 Bureau of Internal Revenue Footnotes 1. Formerly: Global Investments 5, Inc.