Whether Certain Benefits, i.e. Separation Pay and Sick Leave Benefits under the "Special Separation Program", Intended to be Implemented are Exempt from Income Tax

February 12, 1991 BIR RULING NO. 018-91 28 (b) (7) (B) 119-90 018-91 Gentlemen : This refers to your letter dated January 5, 1991 stating that the SMC Shipping and Lighterage is a independent registered corporation; that it has its own "Retirement Plan" which is fully financed by the corporation; that it has also a "Health and Welfare Plan" non-contributory which provides for sick leave benefits; that sick leave benefits to the extent of accumulated 180 days only accrue when the employee retires at the age of 65 or dies while on the service; that anything in excess of 180 days, however is commutable to cash every year; that SMC Shipping and Lighterage is in the process of streamlining its organization to improve labor productivity, enhance efficiency and reduce labor costs; that the company is expecting reduced goods to haul due to expected considerable reduced sales volume; that to help employees that will be affected by the reorganization, the company under a "Special Separation Program" is willing to pay Separation Pay Benefits which shall consist of his full retirement benefits under the company's Retirement and Health Benefits Plan plus the following additional separation pay premium as follows: cdt a) For those with length of service of less than ten (10) years, he/she shall receive separation pay premium equivalent to 50% of monthly basic pay multiplied by the number of years of service or P25,000.00 whichever is higher; b) For those whose length of service is over ten (10) years but less than fifteen (15) years, he/she shall receive a separation pay premium equivalent to 50% of monthly basic pay multiplied by the number of years of service; and c) For those with at least fifteen (15) years of service, he/she shall receive a separation pay premium equivalent to 75% of his/her monthly basic pay multiplied by the number of years of service. In connection therewith, you now request a ruling as to whether the aforementioned benefits, i.e. separation pay and sick leave benefits under the "Special Separation Program", which you intend to implement are exempt from income tax. In reply thereto, I have the honor to inform you that under 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 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 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 the separation of the employees of SMC Shipping and Lighterage is beyond their control, any and all amounts to be received by them from the company as a result thereof, are exempt from all taxes and consequently from 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. Finally, the tax exemption does not include the company's payment for salary and cash equivalent of accumulated vacation and sick leave credits of its employees. cdti Very truly yours, (SGD.) JOSE U. ONG Commissioner