September 6, 2012

BIR RULING NO. 555-12

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 Parity Packaging Corporation 24 Fortune Avenue Brgy. Fortune, Marikina City Attention: Charles Sia President Gentlemen : This refers to your letter dated December 5, 2011 requesting for confirmation of opinion that the separation benefits and other benefits of your retrenched employees are exempt from income tax and consequently from withholding tax.
cASEDC

It is represented that Parity Packaging Corporation (PPC) is a domestic corporation primarily engaged in the manufacture of cigarette boxes and printing materials. Parity Packaging Corporation provides this particular service for Fortune Tobacco Corporation (FTC). Due to the integration of business operations undertaken by FTC and Philip Morris Philippines Manufacturing, Inc. (PMPMI), processes and functions common to both companies were streamlined. As a result of streamlining, FTC undertook massive job cuts involving not only its employees but also such functions and processes which were originally being outsourced to other companies, among which, is the manufacturing of cigarette boxes and printing materials. As a consequence of this reduction of PPC's workload, it was forced to trim down its operations resulting to lay-offs. To cushion the effect on employees who will be losing their jobs, PPC provided a separation package as follows:
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1.

Special Separation Program (for employees qualified for compulsory/optional retirement) a. b. c. Early retirement pay under the existing Retirement Plan Additional gratuity pay of Twenty Seven (27) Days for every year of service Additional gratuity of P60,000.00 if interest in the program is communicated within the time set

2.

Those not qualified under the optional retirement a. Thirty (30) Days pay for every year of Service.
ACEIac

Moreover, PPC has a BIR-approved Retirement Plan.

Under the separation package, PPC has provided a Special Separation Program (SSP) that covers optional or mandatory retirement of qualified employees. The SSP under Package 1 shall actually make use of the existing company's Employees Retirement Plan and therefore, shall retire only qualified employees who have met the two (2) conditions set forth by Section 32 (B) (6) (a) of the Tax Code of 1997, as amended. Furthermore, for those affected employees who are not qualified under the Special Separation Program, or are qualified but have not voluntarily availed/applied for early retirement under the Special Separation Program, PPC shall pay their separation benefits under Item 2 of the separation package. 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) 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
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December 1, 2010) Accordingly, the retirement benefits under the BIR-approved Retirement Plan to be received by the qualified employee-member shall be exempt from income tax provided the two (2) conditions set forth by Section 32 (B) (6) (a) of the Tax Code 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 Plan other than retirement benefits shall not be covered by the tax exemption unless they are also expressly exempt from tax pursuant to the other provisions of the Tax Code. Further, the separation pay to be received by the employees deemed as occupying redundant positions as a result of their separation from the service are 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)
TAcSaC

Moreover, pursuant to Section 2.78.1 (A) (7) of RR 2-98, as amended, 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 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. 199-2011 dated June 29, 2011) Lastly, the separation from the service must be the direct result of actual retrenchment implemented and not due to the employee's qualification to the compulsory/optional retirement program of the company. 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,

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(SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue

Copyright 2013

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2013