BIR Ruling

March 14, 1968 Atty. R. E. Dayao Legal Department, Marsman & Co., Inc. P.O. Box 297, Manila S i r : This refers to your letter dated February 20, 1968 requesting a ruling based on a query stated as follows: "Is separation or termination pay received by an employee from his employer under Republic Act 1787, otherwise known as the Termination Pay Law, subject to withholding income tax?" In reply thereto, I have the honor to inform you that pursuant to the final proviso of Section I Republic Act No. 4917, in case of separation of an official or employee from the services of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by him or his heirs from the employer as consequence of such separation shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action. No hard and fast rule may be adopted as interpretative of the phrase "beyond the control of the official or employee" within the contemplation of Republic Act No. 4917. For this purpose, the fact of each particular case must have to be considered. The separation or termination pay received by an employee from his employer under the Termination Pay Law may or may not be entitled to the tax exemption benefit under Republic Act 4917 depending upon the cause for the separation from or termination of services. If the cause for terminating the employment is the closing or cessation of operation of the establishment or enterprise or any analogous cause, like for example the displacement of human labor by mechanization process, then it is safe to say that the separation from services is beyond the control of said official or employee. Hence, any amount received by said official or employee as a consequency of such separation is entitled to the exemptions provided for by Republic Act No. 4917, and necessarily said amount is exempt from withholding income tax. On the other hand, if the cause for the termination of services is serious misconduct or willful disobedience by the employee of the orders of his employer or representative in connection with his work, or gross and habitual neglect by the employee of the trust reposed on him by his employer or representative, or commission of a crime or offense by the employee against the person of his employer or any immediate member of his family or representative, or other analogous case, then the termination of services is deemed not beyond the control of the employee for purposes of Republic Act No. 4917, the cause being the employee's own making. Accordingly, any amount received by the employee as termination pay is not entitled to the tax exemption benefit provided for by the Act, and necessarily, the employer should withheld the income tax due thereon and remit said tax to this Bureau. lexlib Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue