Taxability of the Additional Separation/Redundancy Payments Equivalent to Unused Vacation and Leave Credits

February 5, 1988 BIR RULING NO. 026-88 28 (b) (7) (B) 333-87 026-88 Gentlemen : This refers to your letter dated November 25, 1987 requesting a ruling as to whether the additional separation/redundancy payments equivalent to unused vacation and leave credits to certain employees of your company are taxable. cdta It is represented that Petrophil Corporation (Petrophil) implemented in March 1987 a manpower reduction program under which Petrophil granted to the separated employees separation/redundancy pay of two months salary for every year of service; that among those separated under the manpower reduction program are eight (8) Petrophil employees; that Petrophil authorized the payment of additional separation/redundancy pay equivalent to all their unused vacation leave credits, subject to the condition that immediately upon their redundancy or separation from Petrophil, they will accept employment in the lower-paying government offices where they were detailed to at the time of their separation, because their continued services were crucial in those government offices, namely: the Department of Finance, the National Treasury, and the Office of Energy Affairs; that under normal Petrophil policy, vacation leave credits up to a maximum of only 40 days may be converted to cash upon separation of an employee; but in the case of the subject employees, this policy was waived because their entire vacation credits exceeding 40 days were converted into their cash equivalent to be paid to them in monthly installments as additional separation/redundancy benefits. In reply, please be informed in the affirmative. 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 employees 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 exemption: (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 eight Petrophil employees under your manpower reduction program is beyond their control, any and all amounts to be received by them as a result thereof, are exempt from all taxes and consequently from the withholding tax prescribed by Section 71, 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. It is, however, understood that the tax exemption does not include company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any. Such being the case, payments of the total cash equivalent of accumulated vacation and sick leave credits, i.e., for forty (40) days plus additional or excess of forty (40) days, to the aforesaid separated employees are subject to income tax and consequently to the withholding tax on wages. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner