SGV & Co.

February 11, 2009 BIR RULING [SB-(010) 091-09] 32 (B) (6) (b); DA-679-07; DA-480-07; DA-246-00 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. W. U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated January 15, 2009, requesting confirmation of your opinion that the separation pay and other benefits received by employees of your client, Accenture, Inc. ("Accenture" or the "Company"), pursuant to an approved redundancy program are exempt from income tax and, consequently, from withholding tax on compensation. ECaScD It is represented that Accenture is a corporation duly organized and existing under Philippine laws. It is also duly registered with the Philippine Economic Zone Authority ("PEZA") as an ECOZONE Information Technology ("IT") Enterprise with Registration Certificate No. 06-37-IT dated July 18, 2006, as amended and supplemented; that it is engaged, among others, in the business of software development ("SD"), business process outsourcing ("BPO") and call center ("CC"); that Accenture generates income primarily and substantially from services rendered within Accenture's locations in PEZA-registered IT Buildings to non-resident foreign clients not engaged in business in the Philippines; that managing supply and demand of resources is a top priority for Accenture; that the Company is taking steps in the Philippines to balance the skills of its workforce against demand from its clients, and is implementing a redundancy program in its Delivery Center Network for Technology in the Philippines to address an imbalance; that the employees whose services are deemed redundant or in excess of business requirements shall be given separation pay and other benefits in accordance with the requirements of law and existing company policies. On the basis of the foregoing representations, you are requesting confirmation of your opinion that the separation pay and other benefits received by Accenture's employees pursuant to an approved redundancy program are exempt from income tax and, consequently, from withholding tax on compensation. In reply, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, any amount received from the employer by an official or employee or by his heirs as a consequence of separation of such official or employee from the service due to death, sickness or other physical disability, or for any cause beyond the control of said official or employee shall not be included in the gross income and shall be exempt from taxation under Title II of the Tax Code. Section 32 (B) (6) (b) of the 1997 Tax Code provides: "SEC. 32. Gross Income. "(A) . . . "(B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: . . . "(6) Retirement Benefits, Pensions, Gratuities, etc. "(a) . . . "(b) 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." IDESTH 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 service of said official or employee must not be asked for or initiated by him. (BIR Ruling No. DA-679-07 dated December 21, 2007) The 1997 Tax Code requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption: (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 official or employee; and (2) the employer pays benefits to said official or employee or his heirs as a consequence of such separation. (BIR Ruling No. DA-480-07 dated September 5, 2007) This Office also has consistently held that when the separation of employees is due to redundancy, hence, beyond their control, any and all amounts to be received by them as a result thereof, are exempt from income tax and consequently from withholding tax. (BIR Ruling No. DA-679-07, supra ) The payment of salaries of the employees and their pro-rated 13th and 14th month pay, however, is subject to income tax and consequently to withholding tax. (BIR Ruling No. DA-246-00 dated May 19, 2000) Based on the foregoing, we confirm your opinion that the separation pay and other benefits received by Accenture's employees pursuant to an approved redundancy program are exempt from income tax and, consequently, from withholding tax on compensation. This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service