Tax Imposed on Company's Payment for Salary, Prorated 13th Month Pay and Cash Equivalent of Accumulated SL or VL

April 5, 1990 BIR RULING NO. 051-90 28 (b) (7) (B) 058-89 051-90 Gentlemen : This refers to your letter dated October 5, 1989 requesting a ruling on the eligibility for tax exemption of the benefits that will be payable under your Special Redundancy Program pursuant to Section 28(b)(7)(B) of the Tax Code. cdtech It is represented that you have recently established that the functions inherent in several job positions in your companies can either be dispensed with or performed by employees occupying other positions, resulting in redundancy; that in view of the increasing cost of labor and the shrinking world market for export-grade bananas, your companies Lapanday Agricultural & Development Corporation, Guihing Agricultural & Development Corporation and Cadeco Agro-Dev. (Philippines), Inc. have embarked on a reorganization program, otherwise known as the Special Redundancy Program (the Program) designed by the companies to (1) streamline and rationalize their operations in a way that will maximize productivity, and (2) provide employees separated from the companies payment of an attractive separation package; that the Program will not alter the provisions of the company's Retirement Plan, whose benefits shall still be paid to qualified employee-members as part of the special separation package given under the Program to improve the productivity by optimizing manpower utilization and reducing costs, so as to ensure the viability of the companies; and that you have decided that the time has come for the Group of Companies to redirect its program aimed at making better use of limited resources and personnel. 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 his heirs from his employer as a consequent 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 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 aforementioned companies 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 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 company's payment for salary, prorated 13th month pay and cash equivalent of accumulated vacation or sick leaves, if any. Very truly yours, (SGD.) JOSE U. ONG Commissioner