Exemption from Income Tax of the Separation Benefit

March 8, 1989 BIR RULING NO. 035-89 28 (b) (7) (B) 572-88 035-89 Gentlemen : This refers to your letter dated February 6, 1989 stating that you suffered a loss of P98.0 Million for 1983; that at present, you are employing about 1400 employees and the prospects for the future are bleak unless radical changes are made in your organization; that part of your Operating and Financial Plan to reduce losses consists of a cost reduction program which partake, among others, of a personnel reduction program due to the present overstaffing of your organization; and that it is envisioned that the present staff will be reduced by 25%. cdtech Based on the foregoing representation, you now request in effect a ruling as to whether or not the separation benefits to be received by the covered employees are exempt from income tax. 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 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 aforesaid employees from the service of your Company is beyond their control, any and all amounts received by them as a result thereof, 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. It must be understood, however, that any benefits given under the abovementioned circumstances must be in accordance with the terms of an existing plan or one that falls under the law, i.e., one-half month for every year of service. (Section 14, Rule I, Book VI, Labor Code) Finally, the tax exemption does not include Company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any. cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner