BIR Ruling [DA-078-00]

February 2, 2000 BIR RULING [DA-078-00] 32 (B) (6) (b) 28-99; 50-99 Protectors of Assets and Personnel Services, Inc. Cadena De Amor Corner Everlasting Sts., UPS IV, Paraaque Metro Manila Attention: Ms . Mirasol C . Jalbuena Finance Manager Gentlemen : This refers to your letter dated August 30, 1999 requesting in effect for an opinion as to whether separation pay due to retrenchment to prevent losses is exempt from tax. This Office has consistently ruled 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 because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee is exempt from taxes regardless of age or length of service pursuant to Section 32(B)(6)(b) of the Tax Code of 1997. The phrase "for any cause beyond the control of the said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The 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. Accordingly, where the separation of an employee or official is due to retrenchment, and therefore beyond his control, any and all amounts to be received by him as a result thereof, 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. The payment of salaries, however, is subject to income tax and consequently to the withholding tax. (BIR Ruling No. SB-28-99 dated May 24, 1999 and BIR Ruling No. SB-50-99 dated July 7, 1999) TEAICc Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)