Isabela II Electric Cooperative, Inc.

September 23, 2009 BIR RULING [SB-(042) 610-09] 32 (B) (6) (b);SB-005-2007 Isabela II Electric Cooperative, Inc. Government Center, Alibagu Ilagan, Isabela Attention: Mr. Michael B. Paguirigan Internal Auditor Gentleman : This refers to your letter dated August 28, 2009 requesting for a ruling that the separation benefits to be received by one of your employees in Isabela II Electric Cooperative, Inc. (ISELCO II) is exempt from withholding tax pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, as amended. Documents submitted show that Michael B. Paguirigan, 46 years of age, is your Internal Auditor and has been under the employ of ISELCO II since July 9, 1985. Prior to his retirement, he was the Internal Auditor of ISELCO II. Based on the Medical Certificate issued by Nelson O. Paguirigan, MD of Gov. Faustino N. Dy, Sr. Memorial Hospital in Ilagan, Isabela, he was diagnosed with Adenola, Colonic Carcinoma, Stage III. The above physician likewise certified that the aforesaid employee was operated in the hospital on June 9, 2008 relative to his affliction. 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 due to death, sickness or other physical disability or for any cause beyond the control of the 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. 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. SHTEaA In view thereof, this Office is of the opinion, as it hereby holds, that any and all amounts which Mr. Paguirigan will receive as a result of his separation from the service of his employer including his terminal leave pay (sick leave and vacation leave credits), due to the aforesaid poor health condition is exempt from income tax and consequently from 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. It is, however, understood that the payment of Mr. Paguirigan's salary is not exempt from income tax and consequently from withholding tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained 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