Benefits Received by Employees as a Result of Their Separation from the Service Due to the Company's Cessation of Business Operations are Not Subject to Withholding Tax

January 11, 1983 BIR RULING NO. 007-83 Gentlemen : This refers to your letter dated October 16, 1982, requesting a ruling as to whether or not the benefits which will be received by your employees as a result of their separation from the service of your company due to its cessation of business operations are subject to withholding tax. In reply thereto, I have the honor to inform you that pursuant to Section 29(c)(7)(B) of the Tax Code, 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 is exempt from tax. The phrase "for any cause beyond the control of the said official or employee" connotes involuntaries 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. In other words, the separation must not be of his own making. (Sec. 4(f); No. 4917; Sec. (2)(b)(2), Rev. Regs. No. 6-82 implementing Secs. 28 and 29, NIRC as amended by B.P. Blg. 135). Accordingly, since the employees adverted to in your inquiry were separated from the service of Arco Pulp & Paper Company, Inc. due to cessation of its business and, therefore, for a cause that is not of their own making and beyond their control, this Office is of the opinion as it hereby holds that the separation pay which they will receive from that company on account thereof are exempt from income tax and consequently, from the withholding tax. It is, however, understood that the tax-exemption does not include company payments for the salary and cash equivalent of accumulated vacation and sick leaves, if any, of the terminated employees. aisadc Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue