Exemption of the Separation Pay Package from Tax

February 11, 1988 BIR RULING NO. 042-88 28 (b) (7) (B) 026-88 042-88 Gentlemen : This refers to your letter dated February 2, 1988 requesting a ruling as to whether the separation pay package of your client, Philippine Commercial International Bank (PCIB) consisting of the gratuity and provident fund benefits under its retirement plan; 50% premium; and leave communications if any to be received by its employees who will be separated or retired as a consequence of its decision to reduce manpower and manpower cost due to automation is subject to tax. cdt It is represented that PCIB intends to retire its senior employees to cut down human resources and manpower cost due to its renewed emphasis on automation; that the employees to be separated are those qualified or eligible to avail of the benefits under its retirement plan (50 years old and with at least 10 years of service); and that the separation pay package is equivalent to the employee's gratuity and provident fund benefits under its retirement plan plus a premium of fifty percent (50%) as well as leave communications (if applicable). 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 employees of PCIB is beyond their control, any and all amounts to be received by them as a result thereof, consisting of the gratuity and provident fund benefits under its retirement plan as well as the 50% premium, 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 the commutations or company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner