Digital Media Exchange, Inc.

February 26, 2009 BIR RULING [SB-(018) 156-09] 32 (B) (6) (b);SB-69-98 Digital Media Exchange, Inc. 8th Floor Net One Center, 26th Street corner 3rd Avenue Bonifacio Global City, Taguig City Attention: Mr. Scott Countryman CEO Gentlemen : This refers to your letter dated August 19, 2008 requesting for a ruling as to whether or not the separation pay to be received by the employees due to retrenchment is exempt from income tax and consequently from the withholding tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. acEHSI It is represented that Digital Media Exchange, Inc.,an online games publisher, will file for a retrenchment program with the Department of Labor and Employment (DOLE) due to serious financial losses incurred in the past year; that with the aging current titles in an increasingly competitive gaming industry, your revenues have been steadily declining to the point that your publishing business has been operating at a loss for the past several months; that while you have taken other measures to cut costs and reduce your operating expenses, these are not enough and have to make the difficult decision to retrench employees in order for your business to survive; and that you have submitted the list of employees who will be included in the retrenchment program to the DOLE. In reply, please be informed that pursuant to Section 32 (B) (6) (a) and (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. ESTCDA 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. Since the separation of the employees was due to retrenchment because of serious financial losses, any amount to be received by them as a consequence of said separation is exempt from income tax and consequently from the withholding tax prescribed under Section 79, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98. However, the payment of the 13th month pay and other benefits, in excess of the P30,000.00 threshold, and the salaries of the said employees are 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. DCHaTc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service