Tax Exemption of Terminal Leave Pay of Retrenched Employees

January 17, 1992 BIR RULING NO. 025-92 28 (b) (7) (B) 238-91 025-92 Philippine Shipyard and Engineering Corp. 2nd Floor, PPL Bldg. U.N. Avenue, Manila Attention: Mr . Manuel C . Salientes, Jr . SVP-Finance & Corporate Services Gentlemen : This refers to your letter dated November 22, 1991 stating that you are a 97% government-owned and controlled corporation engaged in ship repair in Subic, Zambales; and that under your company's retrenchment program, involuntarily retrenched employees shall receive in addition to their separation pay, the cash equivalent of their unused accumulated vacation and sick leaves. In connection therewith, you posed the query on whether the retrenched employees, your corporation can claim the same tax exemption for their terminal leave pay considering that they are employees of a government corporation and their separation is beyond their control. In reply, please be informed that under Section 28(b)(7)(B) of the Tax Code, as amended by E.O. 37, 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 , shall not be included in gross income and shall be exempt from taxation under Title II of the Tax Code. The Supreme Court in the case of Commissioner of Internal Revenue vs. the Court of Appeals and Efren P. Castaeda, G.R. No. 96016, October 17, 1991, ruled that the terminal leave pay received by a government official, or employee is not part of compensation, but a retirement benefit exempt from income tax, and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code as amended by B.P. Blg. 135 and as implemented by Revenue Regulations No. 6-82 , as amended. adc Such being the case, the terminal leave pay of your retrenched employees is not subject to income tax and consequently to the withholding tax. Very truly yours, (SGD.) JOSE U. ONG Commissioner of Internal Revenue