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 City
Attention: Angelo Ang
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 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. Northern
Tobacco 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), another cigarette manufacturer, processes
and functions common to both companies were streamlined. As a consequence of the
reduction of company's workload, Northern Tobacco was forced to trim down its
operations and job lay-offs followed. To cushion the effect on employees who will
lose 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

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 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 who

have rendered less than 6 months work in a season but with
a 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 seasons

Or

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 its
concerned 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 be
received 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 Plan
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. (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 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
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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. 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 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. 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. 124-14 dated May 15, 2014) TaCDAH

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. 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, then
this ruling shall be considered null and void.

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES

Commissioner
Bureau of Internal Revenue

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 Endnotes

1 (Popup - Popup)
1. See annex.

2 (Popup - Popup)
* Note from the Publisher: Copied verbatim from the official copy.

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