Castillo Laman Tan Pantaleon & San Jose

September 15, 2009 BIR RULING [SB-(038) 582-09] DA-464-05 Castillo Laman Tan Pantaleon & San Jose The Valero Tower Street, 122 Salcedo Village 1227 Makati City Attention: Atty. J. Gregson A. Castillo Gentlemen : This refers to your letter dated July 16, 2009 stating that San Technology, Inc. (STI) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) and is engaged in the development, manufacture and sale (excluding export) of semiconductors, computer hardware, software and equipment, telecommunications equipment, and magnetic appliances, among others; that for the past several months, STI has been experiencing a slowdown in its business; that the current global recession has resulted in a sharp decrease in production orders, the constant postponement of delivery dates and a higher rate of order cancellations; that in order to maintain the viability of its business, STI has been forced to implement cost reduction measures, such as a compressed work week, reduction of working hours, stoppage of overtime, scheduled vacation leaves and even temporary shutdowns in some plants; that however, in spite of these measures, STI has continued to suffer from lack of business and the costs entailed by excess manpower; that STI has launched the captioned early retirement program (ERP) for a limited period, as a means to downsize the company's manpower complement; that the ERP covers all employees who have rendered service with the company for 10 years or more as of March 31, 2009; that the ERP will accommodate approximately 100 applicants, or 60 daily paid and 40 monthly paid employees; that the Management entertainments applications on a "first come, first served" basis, and has the exclusive discretion to accept or reject applications depending on the requirements of the business. Employees affected by the downsizing will be entitled to the following benefits: A. Separation pay computed according to the following table: Years in service Percentage of Daily Basic Pay 10 55% 11 60% 12 70% 13 75% 14 85% 15 100% 16 110% 17 120% 18 130% 19 140% 20 150% B. One month economic assistance C. One month pay D. Pro-rated 13-month pay E. Pro-rated sick and vacation leave conversion F. Tax refund and that in connection with the proposed reduction of its employees, STI has filed an Established Termination Report filed on April 27, 2009 with the Department of Labor and Employment detailing the data of the employees affected by the downsizing of the organization. TcADCI Based on the foregoing representations, you now request confirmation of your opinion that any amount or benefit granted by STI to its employees under its aforementioned ERP undertaken to prevent serious business losses are exempt from income tax and consequently from withholding tax pursuant to Section 32 (B) (6) (a) of the Tax Code of 1997. 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 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. Since the availment of the ERP is beyond the control of the employees, any and all amounts that they will receive as a result thereof is exempt from income tax and consequently, from withholding tax as prescribed by Section 70, Chapter XIII, Title II of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended. Moreover, the terminal leave pay, i.e., the accumulated vacation and sick leave credits which is part of the tax-exempt separation pay is also exempt from tax. (BIR Ruling No. 98-91 dated June 4, 1991 citing Commissioner of Internal Revenue v. Court of Appeals and Efren P. Castaneda, G.R. No. 96016 prom. October 17, 1991) . 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service