When Separation Pay Benefits of Employees may be Exempt from All Taxes

March 13, 1991 BIR RULING NO. 043-91 28 (b) (7) (B) 199-90 043-91 Gentlemen : This refers to your letter dated January 22, 1991 requesting confirmation on the ruling of non-taxability of the separation pay benefits under a special separation program which your company intends to implement. cdta It is represented that your Company is on a reorganization program whereby to lower the costs of production and to make it more competitive in the domestic market, it has to reduce its staff; that as a result of such reduction some of your employees who will be affected by the reorganization will be given early retirement benefits. In reply, please be informed that under Section 28(b) (7) (B) of the Tax Code, as amended, any amount received by an official or employees 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 said official or employee, is exempt from taxes regardless of age or length of service. The above-mentioned 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, as represented, your company is on a reorganization process, the cause of separation from the service of your employees affected therein, is beyond their control and, therefore, not voluntary on their part. Such being the case, the non-taxability of the separation benefits you will grant your employees as a result of your reorganization is hereby confirmed. In view thereof, any and all amount received by them as a result thereof, are exempt from all taxes; and, consequently from the withholding tax prescribed by Section 72, Chapter 10, 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 salary and cash equivalent of accumulated vacation and sick leave credits, if any, of its employees. cdti Very truly yours, (SGD.) JOSE U. ONG Commissioner