BIR Ruling [DA-388-05]

September 12, 2005 BIR RULING [DA-388-05] Philippine Savings Bank PSBank Center 777 Paseo de Roxas corner Sedeo Street Makati City Attention: Mr. Jose Vincent M. Tayag Manager, Compensation & Benefits Human Resources Group Gentlemen : This refers to your letter dated June 20, 2005 requesting for clarification as to whether or not the separation benefits to be received by your employee who voluntarily resigned from the bank at the age of fifty (50) years old and had served more than twenty eight (28) years of service is exempt from income tax and consequently from withholding tax. It appears that Section 1, Article IV of the Bank's Retirement Plan states that "any member who reaches the age of sixty-five (65) shall be compulsorily retired any day within the three (3) month period following his attainment of age 65, except those becoming members of the Plan after January 1, 1998 who shall be compulsorily retired upon reaching age fifty-five (55)." In reply thereto, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, 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 said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of the said official or employee" in effect connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be of his own making. (Sec. 4 (f), Revenue Regulations No. 1-68 and Sec. 2 (b) (2), Revenue Regulations No. 6-82, as amended) CSDTac The above-mentioned law requires the presence of these two sine qua non conditions in order that the separation pay of an official or employee may be exempt from tax, viz: (1) The official or employee's separation from the service of his employer is due to death, sickness or other physical disability or for any cause beyond his control; and (2) The employer pays separation benefits to such official or employee separated from the service of his employer or to his heirs as a consequence of such involuntary separation. It is clear from the foregoing facts that your employee's separation from the service is due to his own making. Such being the case, the separation benefits he will receive is subject to income tax and consequently to withholding tax considering that his separation is voluntary or initiated by him. Only separation benefits paid to employees by their employer due to their involuntary separation therefrom as contemplated under Section 32 (B) (6) (b) of the Tax Code of 1997 may be exempt from income tax. (BIR Ruling No. DA372-04 dated July 5, 2004) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service