Separation Pay - Tax Exempt

January 14, 1993 BIR RULING NO. 013-93 SEPARATION PAY TAX EXEMPT 28 (b) (7) (B) 189-92 013-93 Chemphil-LMG, Inc. Chemphil Building 851 Pasay Road Legaspi Village, Makati Metro Manila Attention: Atty . Antonio P . Jazon, Jr . AVP-Legal Services This refers to your letter dated September 17, 1992 requesting for a ruling as to whether or not the amounts to be received by the employees availing of their normal retirement benefits and supplementary payments under Special Early Retirement Program (SERP) are exempt from tax. It is represented that Chemphil-LMG, Inc. (CLI) is a manufacturer of industrial chemicals; that for the past several years, the return of investment has been very discouraging; that it realized a low net profit of P6.56 million which are not from its manufacturing operations but from its trading transactions; that the principal business of CLI (Inorganic Division) is manufacturing of industrial chemicals and not trading; that during the first two quarters of this year, the manufacturing operations resulted in a net loss of P5.90 million; that in order to improve the productivity of its operations and to make it more efficient and viable, the management deemed it absolutely necessary to reduce its workforce by at least 20% in order to reduce the payroll costs and related expenses; that at present, the CLI (Inorganic Division) is over-staffed and its personnel have overlapping functions; that management has offered a Special Early Retirement Program (SERP) for employees who would be separated from the company upon company's discretion or selection; that the company will grant to these employees an incentive or supplementary payment in addition to what the employees will receive under the Retirement Plan which will be 50% of his retirement benefit from the regular retirement plan; that Chemphil-LMG, Inc. Employees' Retirement Plan was duly approved by this Office on April 2, 1982 as a qualified reasonable trusteed private retirement benefit plan within the contemplation of R.A. 4917 [now Section (28(b)(7)(B) of the Tax Code]. In reply thereto, please be informed that any amount received by an official or employee or by his heirs from his employer as a consequence of separation by 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 taxes regardless of age or length of service. 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 used for or initiated by him. In other words, the separation must not be of his own making or choice. Since the separation of your employees is due to either reduction of workforce and redundancy and/or of the overlapping of functions, their separation is beyond their control and therefore, any and all amounts that they will receive from the company as a result thereof, are exempt from all taxes and consequently, from the withholding tax prescribed by Section 72, Chapter X, Title II of the Tax Code as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. It is understood, however, that the aforesaid tax exemption does not include your payment of salaries to the employees separated under your Special Early Retirement Program. cdtech JOSE U. ONG Commissioner of Internal Revenue