Platon Martinez Flores San Pedro Leaño

February 4, 2009 BIR RULING [SB-(005) 066-09] Sec. 32 (B) (6) (b); DA-505-06 Platon Martinez Flores San Pedro Leao Law Offices 6th Floor Tuscan Building, 114 V.A. Rufino Street Legaspi Village Makati City Attention: Attys. Anthony Brett M. Abenir and Grace P. Quevedo-Panagasan Gentlemen : This refers to your letter dated October 31, 2008 requesting in behalf of your clients, ON Semiconductor Philippines, Inc. (ON Semi Phils.) and AMI Semiconductor Philippines, Inc. (AMI Phils.), for a ruling on the tax consequences relative to the separation benefits to be paid to its terminated employees by reason of redundancy . The facts of the instant case are as follows: ON Semi Phils. is engaged in the business of manufacturing, producing, assembling, processing, servicing, importing, exporting, buying, selling, distributing and marketing and/or contract manufacturing, or contractor for the manufacture, production, assembly, processing, servicing, import and export, of electronic products and the parts, components and accessories therefor, including specifically semiconductor devices of every type and description, especially integrated circuits and transistors now in existence or as may be subsequently be developed, and communications equipment and products of every kind whatsoever, especially hybrid modules for one-way and two-way communications equipment such as but not limited to paging receivers, piezo-electric products, crystals and crystals blanks, data clock hybrids, battery charges, and two-way radio receivers; installation, assembly, servicing, repair and maintenance of communications and telecommunications equipment and product; and in connection therewith, to the extent permitted by law, to acquire, construct, lease, service own and maintain factories, machinery, equipment, appliances, airplanes; ships, lighters, docks, piers, warehouses, storage, shipping facilities, buildings, structures and works of all kinds and for other purposes incidental to its business. It is an affiliate of ON Semiconductor (ON Semi),which is a corporation organized under the laws of the State of Delaware, USA. ACIEaH On May 18, 2008, ON Semi acquired AMI Semiconductor (AMI),a corporation organized under the laws of the State of Delaware, USA, and all its subsidiaries and affiliates worldwide, including AMI Phils. AMI Phils. is engaged in the business of manufacturing, assembling, selling, transferring, or disposing, and generally dealing in and with any type of electronic and electrical products including components, accessories or materials therefore. An integral component of the acquisition is the merger of ON Semi Phils. and AMI Phils. During the interim period prior to the effective date of merger between the two companies, ON Semi Phils. and AMI Phils. will provide transitional support services to each other as may be required from time to time by their operations. Accordingly, the support services departments of ON Semi Phils. and AMI Phils. will be immediately integrated to reduce overall operating costs and business expenses and enhance efficiency and competitiveness. In view of the similarity in the operations and business of ON Semi Phils. and AMI Phils.,the integration of their support services have rendered and will render superfluous some positions in both companies. Thus, certain employees of both ON Semi Phils. and AMI Phils. will be terminated in phases or at various stages during the interim period on ground of redundancy . ON Semi Phils. and AMI Phils. employees who will be terminated on ground of redundancy are entitled to receive a separation package consisting of: 1. Separation pay equivalent to one month salary for every year of service; 2. Retirement Benefits; 3. Commutation of accrued and unused sick leave and vacation leave credits; 4. Last month salary; and 5. 13th/14th month bonus. 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 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. DAEIHT 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, because of acquisition undertaken by ON Semi of AMI Semiconductor including its subsidiaries and affiliates worldwide, including AMI Phils.,ON Semi had decided to undertake extensive operational and reorganization and restructuring in order to effectively and efficiently maximize its expanded global operations vis--vis its subsidiary and affiliated companies all over the world. The support services departments of ON Semi Phils. and AMI Phils. will be immediately integrated to reduce overall operating costs and business expenses and enhance efficiency and competitiveness. As a consequence of such integration of the support services, it will render superfluous some positions in both companies. Accordingly, where the employees are separated involuntarily from the service due to redundancy ,the same being beyond their control, the separation benefits and the cash equivalent of vacation leave credits that will be received by the employees from both companies upon their separation from employment due to redundancy are exempt from income tax and consequently from withholding tax. The retirement benefits shall be 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 amended, and as implemented by Revenue Regulations No. 2-98, as amended. The payment of salaries ,however, shall be subject to income tax and consequently to withholding tax. (SB-003-2007 dated February 21, 2007) Finally, the payment of 13th/14th month bonus and other benefits in excess of the P30,000.00 threshold shall be subject to income tax and consequently to withholding tax. (SB-021-2003 dated August 21, 2003) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service