NEC Technologies Hongkong Limited

June 1, 2010 BIR RULING [SB-(004) 033-10] Sec. 32 (B) (6) (b); BIR Ruling No. 163-92; DA-350-97; DA-427-99; DA-222-2007; SB-69-98 NEC Technologies Hongkong Limited Manila Regional Office 27th Floor Petron Mega Plaza 358 Sen. Gil J. Puyat Avenue, Makati City, Philippines Attention: Mr. Hiroshi Kohriyama General Manager/ Chief Regional Officer Gentlemen : This refers to your letter dated August 19, 2008 requesting tax exemption of the separation benefits to be received by the employees of NEC Technologies Hongkong Limited ("NTH-MRO" for brevity) due to its closure under Section 32 (B) (6) (b) of the Tax Code of 1997. aAcHCT It is represented that NTH-MRO, with Taxpayer Identification No. 000-655-370, is a corporation engaged in production management which has suffered continuous operational/financial reverses for the past years; that despite sincere efforts to maintain the operations, the country's depressed economic situation and the continuing decline in the demand of FDD in the international market collectively contribute to continuous financial reverses further diminishing the corporation's competitiveness; that in view of said developments, the Board of Directors of NEC Technologies Hongkong, Ltd. has found no other recourse but to cease business operations effective at the close of business hours on September 15, 2008 to avert further losses; that by provisions of Article 283 of the Labor Code, NTH-MRO will commence separation of the services of twenty-nine (29) affected regular employees in two (2) batches to take effect on the 15th September 2008 and 30th September 2008; that NTH-MRO has duly notified the Department of Labor and Employment (DOLE) of its closure on August 14, 2008 with the following list of employees: 1. Zenaida B. Abraham 2. Rosa Bydalyn B. Alon-Alon 3. Rose F. Badeo 4. Nelia A. Cabacungan 5. Sonya A. Caranto 6. Rosita A. Cisneros 7. Joanne N. Concepcion 8. Ronald F. de Asis 9. Leda S. Delos Santos 10. Rodeta B. Escalera 11. Marife M. Gaspar 12. Toshio Homma 13. Hiroshi Kohriyama 14. Estrella P. Long 15. Lorenzo B. Magpantay 16. Lorna F. Maraya 17. Aiza I. Mascariola 18. Morikazu Matsumura 19. Monday L. Meneses 20. Emma M. Mercado 21. Anna Pamela T. Najorda 22. Marilyn A. Oabel HEaCcD 23. Catherine M. Ramos 24. Mary Catherine E. Saria 25. Christina R. Solver 26. Adora Joy E. Torres 27. Mei Anne P. Torres 28. Geraldine S. Tresmonte 29. Maria Elena A. Victoria that NTH-MRO has notified the BIR Revenue District Office No. 049-North Makati of its cessation of operations on September 15, 2008 and termination of business effective October 31, 2008 as well as cancellation of its BIR Registration; that in the interest of helping NTH-MRO's employees to alleviate the effect of separation from employment, NTH-MRO decided to a grant separation package as follows: a) Separation pay equivalent to one (1) month basic salary per year of service; b) Two (2) months of basic salary; c) Payment of the cash equivalent of earned and unused vacation leave and sick leave credits; d) Pro-rated 13th month pay; e) Group life insurance coverage until the expiration of service contract on September 30, 2008; and f) Continued health/hospitalization services coverage until the expiration of service contract on April 28, 2009. that the benefits to be received by the employees under this separation program are in accordance with the terms specified under the law and the Labor Code of the Philippines. HSCATc 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. (BIR Ruling Nos. 163-92 dated May 25, 1992; DA-350-97 dated October 23, 1997; DA-222-07 dated April 12, 2007) Since the separation of the NTH-MRO employees is due to the closure of the establishment, and, therefore, beyond their control, any and all amounts to be received by them as a result thereof, are exempt from the 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. The payment of the salaries of the employees, however, is subject to income tax and consequently to the withholding tax. (BIR Ruling No. SB-69-98 dated October 6, 1998) 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, Commissioner of Internal Revenue By: (SGD.) MARISSA O. CABREROS OIC-Assistant Commissioner Legal Service