BIR Ruling No. 611-12

November 8, 2012 BIR RULING NO. 611-12 Section 32 (B) (6) (b) of the Tax Code, as amended; BIR Ruling No. 199-11; BIR Ruling No. 084-10; BIR Ruling No. 131-10; BIR Ruling No. 021-10 MLM Foods, Inc. Samson Road, West Service Rd. Sucat, Muntinlupa City Attention: Ilene G. Alba HR & Admin Manager Gentlemen : This refers to your letter dated February 23, 2012 duly indorsed by Revenue Region No. 8 Makati City, requesting for ruling that the separation benefits and other benefits of your employees due to redundancy are exempt from income tax and consequently from withholding tax. AEaSTC It is represented that MLM FOODS, INC. with Tax Identification No. 000-792-432-000, is a domestic corporation primarily engaged in the business of manufacturing, processing, formulating and canning of food, foodstuff, food preparations, household goods and home products of all kinds, types and description; that the main reason for retrenchment of workers is to streamline its retail operations to prevent financial losses and due to decreased volume of sales by closing down several retail outlets and consolidating the functions of its personnel, particularly those of store supervisors whose services are in excess of what are reasonably demanded by the company's operation effective February 29, 2012; that effective March 31, 2012, MLM FOODS, INC. shall permanently terminate three (3) of its employees, to wit: Name of Employees Position Date Hired Mangawang, Regie F. Supervisor January 16, 2002 Basco, Victor C. Asst. Store Crew February 19, 1999 Miranda, Rachelle Ann R. Store Crew December 16, 2009 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. 084-10 dated October 6, 2010) 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. 131-10 dated December 1, 2010) Accordingly, the separation pay to be received by the employees deemed as occupying redundant positions as a result of their separation from the service are 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. 021-10 dated July 30, 2010) 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. 199-2011 dated June 29, 2011) TCacIA 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. 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 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