BIR Ruling No. 481-12

July 30, 2012 BIR RULING NO. 481-12 Sections 32 (B) (6) (b) & 34 (A) (1) (a) (i) 1997 Tax Code, as amended; BIR Ruling No. 199-2011 Manalo Jocson & Enriquez Law Offices 7th Flr.,The Infinity 26th St.,Bonifacio Global City Taguig, Philippines Attention: Marichelle B. Recio Gentlemen : This refers to your letter dated February 15, 2012 requesting, on behalf of Remec Broadband Wireless International, Inc. ("the Company"),confirmation of your opinion that the separation benefits that would be given to the Company's employees, on account of their separation from employment due to the retrenchment program of the Company to prevent business losses, are exempt from the income tax and, consequently, from the withholding tax. It is represented that the Company, with Tax Identification Number 240-248-045-000, is a corporation organized and existing under the laws of British Virgin Islands; that the Company is duly licensed to transact business in the Philippines pursuant to the Securities and Exchange Commission (SEC) License No. FS200513902, through its branch office located at 103 Innovation Drive, Carmelray Industrial Park I, SEZ, Canlubang, Calamba City, Laguna; that due to the slump in demand in international market and the continuous low level of revenue, the Company has decided to amend its employment structure in order to avoid incurring further financial losses; that the appropriate notices of termination of employment were properly served with the concerned employees and the Department of Labor and Employment (DOLE); and that the affected employees would be given separation benefits in accordance with the applicable provisions of the Labor Code and other social legislation. The affected employees, and their corresponding positions, are the following: cCaATD Names of Affected Workers Position 1 Aguila, Menrado G. Sr. Buyer 2 Aliparo, Raymond E. Jr. Application Developer 3 Auza, Roy F. Sr. Manager 4 Bait, Hector T. Facilities Technician 5 Baldoza, Richard F. Material Handler I 6 Balingbing, Nestor S. Facilities Technician 7 Balugo, Francis M. Engineer 1 8 Basilio, Arlene R. Executive Assistant 9 Batacan, Irene N. Sr. Industrial Engineer 10 Batalla, Janet A. Assembler 11 Belo, Mark Anthony O. Training Assistant 12 Bocalbos, Jayson P. Supervisor 13 Borboran, George D. Planner 14 Borja, Lemuel Dave P. Manager 15 Briones, Gene B. Sr. Manager 16 Cadacio, Raymundo V. Manager 17 Casis, Leodemayo C. Manager 18 Castillo, Melvin D. NPI Technician 19 Celemin, Valiant P. Shipping Clerk 20 Coleto, Anthony Carlo J. VMI Clerk 21 Cristobal, Ma. Elynda C. Material Handler 22 De Guzman, Lilibeth P. Sr. Commodity Buyer 23 De La Cruz, Kristel O. Engineering Clerk 24 Esteban, Francis Aaron A. Kitter/Encoder 25 Estrella, Rothlyn O. Mechanical Drafter 26 Fajardo, Annabelle Lee J. Engineering Clerk 27 Garcia, Florante B. Senior Manager 28 Jose, Darwin A. Replenisher 29 Manimtim, Nolasco A. Facilities Maintenance/Driver 30 Marias, Jennifer D. Material Handler 31 Marquez, Benedict D. Manager 32 Mijares, Glenn Reu M. Material Handler 33 Negrillo, Jonnalyn M. Assembler 34 Opea, Melvin M. Material Handler 35 Ornillo, Genaro E. Planning Assistant 1 36 Padua, Maria Luisa G. Supplier Relations Manager 37 Pagaduan, Byron L. Sr. Commodity Buyer 38 Paguio, Czarina Angelica N. RF Product Engineer 39 Pamplona, Mark Joseph T. Receiving Clerk 40 Par, Noel T. Supplier Quality Engr. 41 Ramos, Rhett Kenneth John V. IT Director 42 Ramos, Arlene T. Manager 43 Raqueo, Romeo Jr. M. Manager 44 Reazo, Jonalyn S. Data Management Assistant 45 Reyes Jr.,Antonio E. Shipping Clerk 46 Rocamora, Jhoana A. Archive Clerk 47 Santos, Antonio B. NPI Sr. Manager 48 Sibulo, Joseph A. Facilities Technician 49 Trinidad, Bryan James B. Shipping Clerk 50 Valdez, Ronald N. Manager 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 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 nor initiated by him. 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. As noted, the employees' separation from employment was due to the retrenchment program of the Company to prevent further business losses which is not of their 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 the separated employees. HDTSIE 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. It is, however, understood that this exemption does not include the payment to the employees of their salaries and the payment of the 13th month pay and other benefits in excess of the Php30,000 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) Finally, the expenses incurred by the Company in providing the said benefits are deductible from its gross income for being an ordinary and necessary trade or business expense pursuant to Section 34 (A) (1) (a) (i) of the Tax Code of 1997. (BIR Ruling No. 199-2011 dated June 29, 2011) This 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 herein set forth. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue