A.M. No. 07-3-09-SC (Re: Proposed Guidelines in the Disposition and/or Destruction of Court Records, Papers and Exhibits [Re: Simplified Guidelines for Disposing of Records of Long-Decided Cases and Unneeded Documents and Papers])

September 4, 2013 BIR RULING NO. 344-13 Section 32 (B) (6) (b) of the Tax Code, as amended; BIR Ruling No. 199-11; BIR Ruling No. 084-10; BIR Ruling No. 131-10; BIR Ruling No. 021-10 Law Offices Siguion Reyna Montecillo & Ongsiako 4th & 6th Floors, Citibank Center 8741 Paseo de Roxas, Makati City Attention: Ferdinand M. Hidalgo Gentlemen : This refers to your letter dated November 5, 2012, requesting on behalf of your client, ABB Inc., requesting for confirmation of opinion that the separation benefits and other benefits of terminated employees is exempt from income tax and consequently from withholding tax. It is represented that ABB, INC. (Formerly: Asea Brown Boveri, Inc.) with (TIN 214-448-262-000) is a domestic corporation primarily purpose is to buy, import, manufacture, assemble, repair and sell at wholesale all kinds of goods, wares and merchandise of every class and description, such as, but not limited to: electrical power generation, transmission and distribution equipment up to the highest voltages and power; control and protection of power and industrial equipment; mechanical, electronic and solid-state apparatus and equipment for all classes of industrial tools and machinery and educational faculties; lifting, transportation and communication media in all forms, mining equipment, also equipment required by the construction, contracting and allied trades and professions as well as associated prime mover equipment and apparatus, such as diesel engines, steam, gas and nuclear, atomic and hydraulic and other thermal or electromagnetic means for the creation of energy sources and to act as manufacturers' representative; and that due to failure to generate business brought about by competition, market size and the current economic condition, ABB, INC. closed its Power systems Division, as a result, it shall permanently terminate twenty four (24) of its employees (see annex) ; and that on October 30, 2012, ABB, INC. notified Department of Labor and Employment-National Capital Region Muntaparlas Field Office of the intention of terminating the following affected employees: Separation Employee's Name Position Title Date Hired date 1 Manalang, Julieta D. Sales Administration Officer 01-Jul-92 30-Nov-12 2 Bonagua, Allan B. Sr. Sales Engineer 17-Sep-07 30-Nov-12 3 Rosales, Jr., Manuel A. Sr. Manager 15-Mar-95 30-Nov-12 4 Acharon, Danilo L. Manager 01-Oct-96 30-Nov-12 5 Ocampo, Araneta M. Sr. Sales Engineer 16-Feb-01 30-Nov-12 6 Bagsit, Jonathan G. Sales Engineer 03-Dec-07 30-Nov-12 7 Evangelista, Ruby Marie I. Sr. Manager 23-Jul-01 30-Nov-12 8 Gallanongo, Remsy B. Project Engineer 03-Dec-07 30-Nov-12 9 Rosario, Jose P. Leadman Panel Assembly 15-Feb-96 30-Nov-12 10 Cortez, Jonathan R. Purchaser 02-Apr-12 30-Nov-12 11 Peralta, Myra P. Purchaser 01-Jun-10 28-Dec-12 12 Jerez, Samuel T. Sr. Manager 24-Apr-97 24-Feb-13 13 Quiazon, Kristoffer Randle E. Sales Support Engineer 01-Mar-10 28-Feb-13 14 Villanueva Jr., Daniel L. Sr. Design Engineer 01-May-05 28-Feb-13 15 Gabuya, Jay Project Manager 01-Feb-11 31-Mar-13 16 Bolando, Maria Natalie A. LBU Controlling Officer 01-Aug-96 30-Jun-13 17 Cruz, Teresita G. Sr. Project Engineer 15-Jul-95 30-Jun-13 18 Patajo, Edgardo G. Manager 16-Dec-10 30-Jun-13 19 Miranda, Riccardo A. Sr. Manager 16-Mar-92 30-Jun-13 20 Abuan, Robert J. Sr. Design Engineer 01-Jan-07 30-Jun-13 21 Cruzat, Jonathan T. Manager 02-Jun-97 30-Jun-13 22 Cuyag, Melecio N. Test Technician 01-Jan-94 30-Jun-13 23 Simpao, Philip M. Sr. Project & Design Engineer 01-Sep-06 30-Jun-13 24 Sacramento, Fritzie L. LBU Controller 01-Mar-99 30-Jun-13 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 same Code. (BIR Ruling No. 084-10 dated October 6, 2010) THAICD 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. (BIR Ruling No. 131-10 dated December 1, 2010) Accordingly, the separation pay to be received by the aforementioned terminated employees as a result of their separation from the service is exempt from income tax and consequently from 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. (BIR Ruling No. 021-10 dated July 30, 2010) Moreover, pursuant to Section 2.78.1 (A) (7) of RR 2-98, as amended, the terminal pay, i.e. , commutation and payment of monetized unused vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to the withholding tax. Conversely, the cash equivalent of vacation leave exceeding ten (10) days is subject to tax. However, this same principle cannot apply to SICK leave credits since an employee must actually go on sick leave to be able to avail of said leave credits. (BIR Ruling No. 199-2011 dated June 29, 2011) It is, however, understood that this exemption does not include the payment of the separated employee's salaries and the payment of the 13th month pay and other benefits in excess of the Php30,000.00 threshold under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. (BIR Ruling No. 199-2011 dated June 29, 2011) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue ANNEX Power Systems Division List of Separated Employees Employee's Name Position Title Date Hired date 1 Manalang, Julieta D. Sales Administration Officer 01-Jul-92 30-Nov-12 2 Bonagua, Allan B. Sr. Sales Engineer 17-Sep-07 30-Nov-12 3 Rosales, Jr., Manuel A. Sr. Manager 15-Mar-95 30-Nov-12 4 Acharon, Danilo L. Manager 01-Oct-96 30-Nov-12 5 Ocampo, Araneta M. Sr. Sales Engineer 16-Feb-01 30-Nov-12 6 Bagsit, Jonathan G. Sales Engineer 03-Dec-07 30-Nov-12 7 Evangelista, Ruby Marie I Sr. Manager 23-Jul-01 30-Nov-12 8 Gallanongo, Remsy B. Project Engineer 03-Dec-07 30-Nov-12 9 Rosario, Jose P. Leadman Panel Assembly 15-Feb-96 30-Nov-12 10 Cortez, Jonathan R. Purchaser 02-Apr-12 30-Nov-12 11 Peralta, Myra P. Purchaser 01-Jun-10 28-Dec-12 12 Jerez, Samuel T. Sr. Manager 24-Apr-97 24-Feb-13 13 Quiazon, Kristoffer Randle E. Sales Support Engineer 01-Mar-10 28-Feb-13 14 Villanueva Jr., Daniel L. Sr. Design Engineer 01-May-05 28-Feb-13 15 Gabuya, Jay Project Manager 01-Feb-11 31-Mar-13 16 Bolando, Maria Natalie A. LBU Controlling Officer 01-Aug-96 30-Jun-13 17 Cruz, Teresita G. Sr. Project Engineer 15-Jul-95 30-Jun-13 18 Patajo, Edgardo G. Manager 16-Dec-10 30-Jun-13 19 Miranda, Riccardo A. Sr. Manager 16-Mar-92 30-Jun-13 20 Abuan, Robert J. Sr. Design Engineer 01-Jan-07 30-Jun-13 21 Cruzat, Jonathan T. Manager 02-Jun-97 30-Jun-13 22 Cuyag, Melecio N. Test Technician 01-Jan-94 30-Jun-13 23 Simpao, Philip M. Sr. Project and Design Engineer 01-Sep-06 30-Jun-13 24 Sacramento, Fritzie L. LBU Controller 01-Mar-99 30-Jun-13