United Coconut Chemicals, Inc.

April 17, 2009 BIR RULING [SB-(021) 264-09] 32 (B) (6) (b); DA-383-06 United Coconut Chemicals, Inc. 17th Floor, UCPB Bldg.,Makati Avenue Makati City Attention: Dr. Carlito S. Puno President & CEO Gentlemen : This refers to your letter dated March 30, 2009 requesting for a ruling that the separation benefits to be paid to the United Coconut Chemicals, Inc. (COCOCHEM) employees who will be resigning from service are exempt from income tax and consequently from the withholding tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. It is represented that COCOCHEM is a corporation engaged in the manufacturing of oleochemical products that maintains a plant in Bauan, Batangas where a majority of its employees report therein; that because of financial losses it has been suffering for three (3) years now, the high cost of production and the effect of global recession to almost all of the oil industries in the Philippines, Management has recently decided with the approval of the Board of Directors to undertake temporary suspension of operations for a period of three (3) months commencing on April 1, 2009 and ending on June 30, 2009; that as a consequence thereof, COCOCHEM has no other choice than to temporarily lay off almost seventy percent (70%) of its manpower and just maintain a skeletal force with the hope that it could resume operations after 3 months; that in compliance with the mandatory giving of thirty (30) day advance notice to employees that will be affected, COCOCHEM issued individual notices of temporary lay off indicating therein that for the entire period that they will be on temporary lay off, the salary and the corresponding benefits due them will likewise be temporarily suspended; that as an off shoot of the issuance of the said notices, some employees have decided to tender their resignation; and that relative thereto, concerns have been raised that since the employees' resignations were prompted by the issuance of the temporary lay off notice, said resignation should be considered involuntary in nature and therefore falls under the phrase "for any cause beyond the control of said official or employee" pursuant to Section 32 (B) (6) (b), Chapter VI of the National Internal Revenue Code of 1997. DCIEac In reply, please be informed that 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 pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997. The phrase "for any cause beyond the control of the 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 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 employees concerned were resigning from the company, hence, not beyond their control but rather voluntary on their part, it is but proper that any and all amounts to be received by them as a result of separation from the service are subject to income tax and consequently to 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 by Revenue Regulations No. 6-2001 and 12-2001. The payment of salaries shall also be subject to income tax and consequently to withholding tax (BIR Ruling No. SB-005-2005 dated September 19, 2005). Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service