Exemption from Income Tax - Separation Benefits

February 9, 1990 BIR RULING NO. 018-90 28 (b) (7) (B) 226-89 018-90 S i r : This refers to your letter dated December 18, 1989 requesting exemption from income tax of the separation benefits you received from your former employer, the Philippine Banking Corporation, pursuant to Section 28(b)(7)(B) of the Tax Code. It is represented that on March 15, 1989, you were separated from the Philippine Banking Corporation at the age of 47 years after rendering more than 25 years of service; that you joined the said bank on May 3, 1963; that the details of your separation pay which you received on July 4, 1989 are as follows: Gratuity Pay P353,916.67 Leave Pay 223,709.20 Total P577,625.87 Less: Withholding Tax 152,177.20 Net Separation Pay P425,448.67 ========== that the reason for your aforesaid request is that the Buyers of the Philippine Banking Corporation who were to infuse additional capital to save the bank from financial collapse were very emphatic and insistent that certain officers of the bank should resign to give way to their own people; that you being one of the assistant vice presidents and Chief, Internal Auditing Department, was holding a key and a very critical position in the bank; that your separation from the bank was so important a consideration for the new owners before infusing the required new capital; and that your separation then was not voluntary but rather a condition imposed by the entry of the new investors in the bank. 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 phrase "for any cause beyond the control of 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. In other words, the separation must not be of his own making or choice. Since your separation from the service of the bank as a result of the infusion of additional capital by the new owners thereof is beyond your control, any and all amounts received by you from the bank as a result thereof, are exempt from all taxes and consequently from the withholding tax prescribed by Section 72 of the Tax Code, as amended by Executive Order No. 37 and implemented by Revenue Regulations No. 12-86 dated August 1, 1986 amending Revenue Regulations No. 6-82. aisa dc Finally, the tax exemption does not include the company's payment of salary and cash equivalent of accumulated vacation and sick leaves, if any. Very truly yours, (SGD.) JOSE U. ONG Commissioner