Whether the Rice Subsidy Does Not form Part of the Employees Yearly Income and Therefore Exempt from Income Tax

February 21, 1991 BIR RULING NO. 029-91 28 (b) (7) (B) 000-00 029-91 M a d a m : This refers to your letter dated September 28, 1990 stating that you filed a case against your former employer before the Department of Labor for illegal dismissal; that in line with the policy of the Department of Labor to encourage the amicable solution of Labor cases, you and your former employer as presently exploring all revenues by which your controversy may be amicably settled; and that your former employer has agreed to pay you a settlement amount in the nature of separation pay. In connection therewith, you now request a ruling as to whether or not your separation pay is subject to 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 your separation is beyond your control, any and all amount to be received by you from the company as a result thereof, i.e., the settlement amount 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 as amended. Finally, the tax exemption does not include the company's payment for your salary and cash equivalent of accumulated vacation and sick leave credits, if any. Very truly yours, (SGD.) VICTOR A. DEOFERIO, JR. Deputy Commissioner