Tax Exemption of Separation Benefits and Incentives Received by Employees Under a Staff Reduction Program

January 9, 1992 BIR RULING NO. 016-92 28 (6) (7) (B) 238-91 016-92 Tan & Federis Law Offices 3rd Floor, Alcco Building Ortigas Avenue, Greenhills San Juan, Metro Manila Attention: Ms . Ma . Gracia P . Tan Gentlemen : This refers to your letter dated October 23, 1991, requesting a ruling as to whether the separation benefits and incentives to be received by the employees of your client, Norgate Apparel Manufacturing Corporation (NAMC), under its Staff Reduction Program is exempt from tax. It is represented that in order to recover from substantial losses, your client will undertake a staff reduction program to streamline and rationalize the company's operations in a way that will maximize productivity and promote cost effectiveness; that in implementing this, it requires the separation from employment of at least ten (10%) percent of its present work force who consent to be separated from that company; and that the selection of the employees to be separated (from among the employees who have consented to their separation from the service) depends upon the reserved right, sole will, judgment and discretion of their employer. In reply, please be informed that pursuant to Section 28(b)(7)(B) of the Tax Code, as amended, 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 abovementioned law requires the presence of these two conditions in order that the employee benefits may be granted tax exemptions: (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. Since the separation of the employees of your client, NAMC, is beyond their control, any and all amounts to be received by them as a result thereof, consisting of the separation benefits and incentives, 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 dated October 1, 1982, as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner of Internal Revenue