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BIR Ruling No. 496-14 (without Annex A).pdf

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  Copyright 1994-2015 CD Technologies Asia, Inc. Taxation 2014 1 December 12, 2014 BIR RULING NO. 496-14 Section 32 (B) (6) (b) of the Tax Code,as amended; BIR Ruling No. 124-14  Northern Tobacco Redrying Co., Inc. Mirra Hills, Vigan CityAttention:  Angelo AngPresident  Gentlemen :This refers to your letter dated December 5, 2011 requesting for confirmationof opinion that the separation benefits and other benefits of your retrenched employees 1(1)  are exempt from income tax and consequently from withholding tax. It is represented that Northern Tobacco Redrying Co., Inc. (Northern Tobacco)is a domestic corporation primarily engaged in redrying of tobacco leaf. NorthernTobacco provides this particular service for Fortune Tobacco Corporation (FTC). Dueto the integration of business operations undertaken by FTC and Philip MorrisPhilippines Manufacturing, Inc. (PMPMI), another cigarette manufacturer, processesand functions common to both companies were streamlined. As a consequence of thereduction of company's workload, Northern Tobacco was forced to trim down itsoperations and job lay-offs followed. To cushion the effect on employees who willlose their jobs, Northern Tobacco provided a separation package as follows:1. Special Separation Program (for employees qualified for compulsory/optional retirement):a. Early retirement pay under the existing Retirement Plan. b. Additional gratuity pay of Twenty Seven (27) Days for every year of service. EHSIcT c. Additional gratuity of P60,000.00 if interest in the program  Copyright 1994-2015 CD Technologies Asia, Inc. Taxation 2014 2 is communicated within the time set.2. Those not qualified under the optional retirement:a. Thirty (30) Days pay for every year of service.3. Seasonal Workers:a. Financial aid amounting to P8,000.00 given to those whohave rendered less than 6 months work in a season but witha total of 6 months for all seasons worked. b. Those who have rendered services for at least 6 months or more in a season:Daily rate x 26 days x number of seasonsOr P8,000.00 whichever is higher Furthermore, Northern Tobacco has a BIR approved Retirement Plan. It appears that Northern Tobacco provided two separation packages for itsconcerned employees: (1) retirement benefit under the existing plan, and (b) *(2) benefit for employees not qualified in the retirement benefit category.In reply, please be informed that for employees availing of the first separation package, the retirement benefits under the BIR approved Retirement Plan to bereceived by the qualified employee-member shall be exempt from income tax provided the two conditions set forth by Section 32 (B) (6) (b) of the Tax Code of 1997, as amended, are met: 1) that the official or employee had been in the service of the same employer for at least ten (10) years; and (2) he is at least fifty (50) years old at the time of retirement. However, other benefits provided for in the Retirement Planshall not be covered by the tax exemption unless they are also expressly exempt fromtax pursuant to the other provisions of the Tax Code. (BIR Ruling No. 124-14 dated May 15, 2014)For employees availing of the second separation package, Section 32 (B) (6)(b) of the Tax Code of 1997, as amended, provides that any amount received by anofficial or employee or by his heirs from the employer as a consequence of separationof such official or employee from the service of the employer due to death, sickness  Copyright 1994-2015 CD Technologies Asia, Inc. Taxation 2014 3 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 taxationunder Title II of the same Code. Thus, Section 32 (B) (6) (b) of the Tax Code of 1997,as amended requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely (1) the employee is separated fromthe 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 suchseparation. The separation pay to be received by the employees deemed as occupyingredundant positions as a result of their separation from the service are exempt fromincome tax and consequently from the withholding tax prescribed by Section 79,Chapter XIII, Title II of the Tax Code of 1997, as implemented by RevenueRegulations No. 2-98, as amended. (BIR Ruling No. 124-14 dated May 15, 2014) TaCDAH Moreover, pursuant to Section 2.78.1 (A) (7) of RR 2-98, as amended, theterminal pay,  i.e., commutation and payment of monetized unused vacation leavecredits 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 vacationleave exceeding ten (10) days is subject to tax. However, this same principle cannotapply to SICK leave credits since an employee must actually go on sick leave to beable to avail of said leave credits. (BIR Ruling No. 124-14 dated May 15, 2014)It is, however, understood that this exemption does not include the payment of the separated employees' 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. 124-14 dated May 15, 2014)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, thenthis ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner  Bureau of Internal Revenue  Copyright 1994-2015 CD Technologies Asia, Inc. Taxation 2014 4 Endnotes1 (Popup - Popup)  1. See annex. 2 (Popup - Popup) * Note from the Publisher: Copied verbatim from the official copy.

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