Separation Pay (Retrenchment) - Tax Exempt

January 15, 1993 BIR RULING NO. 035-93 SEPARATION PAY (RETRENCHMENT) TAX EXEMPT 28 (b) (7) (B) 197-92 035-93 Norgate Apparel Manufacturing, Inc. 3rd Floor, King's Court Annex Bldg., 2129 Pasong Tamo, Makati, Metro Manila Attention: Mr . Yukio Morimura VP-Treasurer This refers to your letter dated November 25, 1992 stating that your company has been experiencing substantial losses from operation; that in order to recover from said losses, the management has decided to undertake or to initiate a Labor Force Reduction/Retrenchment Program; that after thorough studies and due considerations, the company finally decided to separate from service a total of 354 workers; that the workers consented to the total number of workers to be retrenched; that the company submitted a retrenchment package to the employees and in order to facilitate the selection of those to be retrenched, you ask the workers to submit the names of those who are interested to avail voluntarily; that you are of the opinion that although the workers may voluntarily avail of the program, but since the retrenchment program was initiated by you, it is therefore beyond the control of the workers; and that in letter dated November 24, 1992 you have informed the Department of Labor and Employment of your decision to retrench and reduce your personnel in view of your continued business losses and reverses which have no concrete prospect to turn-around in the foreseeable future. cdtech In connection therewith, you are requesting opinion as to whether the benefit to be received by the employee as a consequence of the retrenchment program is exempt from tax. In reply thereto, 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 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 physical disability or for any cause beyond the control of 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 employee. The separation from the service of the official or employee must not be asked for or initiated by him. The abovementioned law requires the presence of these two (2) conditions in order that the employee benefits may be granted tax exemptions: (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 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 your employees under your Labor Force Reduction/Retrenchment Program 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, as amended. Moreover, the terminal leave pay i.e., the accumulated vacation and sick leave credits which is a part of the tax-exempt separation pay is also exempt from tax (See Commissioner of Internal Revenue vs. Court of Appeals and Efren P. Castaeda, G.R. No. 96016 prom. October 17, 1991). The exemption is understood not to include the company payment of salaries and prorated 13th month pay, if any. aisadc JOSE U. ONG Commissioner of Internal Revenue