BIR Ruling No. 519-12

August 17, 2012 BIR RULING NO. 519-12 Sections 36 (B) (6) (b) and 34 (A) (1) (a) (i) of the Tax Code of 1997, as amended; and Section 2.78.1 (A) (3) (a) and (A) (7) and of RR 2-98; BIR Ruling No. 481-12 dated July 30, 2012; and BIR Ruling No. 199-2011 dated June 29, 2011 Land O' Lakes Foundation Phils.,Inc. 19th Floor L. V. Locsin Building, 6752 Ayala Avenue corner Makati Avenue, Makati City 1224, Philippines Attention: Qazi Yawar Naeem Country Manager Gentlemen : This refers to your letter dated 14 June 2012 requesting for a confirmatory ruling to the effect that the severance pay of your employees are exempted from payment of taxes pursuant to Revenue Memorandum Order No. 26-2011 dated 13 June 2011. It is represented that Land O' Lakes Foundation Philippines, Inc. is a duly registered domestic corporation with Securities and Exchange Commission (SEC) Registration No. CN 200259324 issued on November 6, 2002 and Bureau of Internal Revenue Taxpayers Identification Number 221-108-438-000. Land O' Lakes Foundation Philippines, Inc. will cease business operation effective 31 August 2012 as evidenced by a duly notarized Secretary's Certificate dated 18 June 2012. The closure of operation is due to the winding-up of its present project which started in 2009 and will terminate on 30 June 2012. In line with closure of operation, Land O' Lakes Foundation Philippines, Inc. have discussed the matter with your staff and also notified the Department of Labor and Employment regarding the termination of its employees. IEDHAT The affected employees, date of their respective contract and salary for FY 2012 are the following: Name Date of Contract Salary FY 2012 1. Aznar, Ricky E. 1 January 2010 Php55,960.00 2. Bacas, Yvonne 16 May 2011 16,960.00 3. Ballego, Floro C. 15 April 2011 17,080.00 4. Balogal, Juliete A. 11 July 2011 15,675.00 5. Bangot, Julie Mae 2 May 2011 16,000.00 6. Barbarona, Jess C. 3 October 2011 18,405.00 7. Baruc, Hector P. 1 January 2010 41,630.00 8. Basit, Timoteo C. 1 January 2010 83,940.00 9. Bunsocan, Jay Loren E. 1 January 2010 32,700.00 10. Cepedoza, Geoffrey G. 1 January 2010 32,700.00 11. Eduave, Valentina J. 15 March 2010 17,490.00 12. Ganir, Eula V. 3 May 2010 35,270.00 13. Gelie, Erwin M. 1 January 2010 36,330.00 14. Juliano Ma. Perpetua G. 1 January 2010 51,070.00 15. Manceras, Kedesh Mae 15 November 2011 17,000.00 16. Olanday, Leo 16 May 2011 16,960.00 17. Olmedo, Nolan 1 October 2010 30,000.00 18. Onez, Alejandro Jr. 3 January 2011 17,600.00 19. Racoma, Alan S. 1 January 2010 114,950.00 20. Ravanera, Ronilo C. 1 February 2011 21,650.00 21. Soler, Phoebe Mae 2 May 2011 15,900.00 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 official or 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 official or employee or his heirs receives any amount from the employer on account of such separation. As noted, the employees' separation from employment was due to the winding-up of Land O' Lakes Foundation Philippines, Inc. 's project which started in 2009 and terminated on 30 June 2012. 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 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. 481-2012 dated July 30, 2012) caADSE Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the separated employees. 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 employee of their salaries and the payment of the 13th month pay and other benefits in excess of 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 is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue