Whether the Separation Pay Paid to Each Concerned Musician is Exempt from Tax

February 11, 1994 BIR RULING NO. 058-94 28 (b) (3) (B) 391-93 058-94 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles Fourth Floor, King's Court 2129 Pasong Tamo, Makati Metro Manila Attention: Atty . Leo Delano C . Pascua Gentlemen : This refers to your letter dated October 25, 1993, stating that in 1985, your client, The Manila Chamber Orchestra Foundation, a non-stock, non-profit entity formed the Manila Chamber Orchestra (MCO) with musicians then mostly recruited from existing orchestras, as well as from the University of the Philippines, College of Music; that since its inception, the MCO was financially supported by the Foundation thru funds generated mostly from contributions; that in May 1993, the Board of Trustees of the Foundation decided to dismantle the entire orchestra due to high cost of maintaining about 34 very talented musicians, among others; and that as a consequence of such dissolution, each of the musicians were correspondingly paid their terminal pay, pro-rata 13th month pay, as well as their separation pay under existing labor laws. In connection therewith, you now request on behalf of your client for confirmation of our ruling that the separation pay paid to each concerned musician is exempt from tax pursuant to Sec. 28(b)(7)(B), as amended. 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 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 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 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 your client's employees due to the dismantling of the entire orchestra 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. In view of the foregoing, the separation benefits including terminal leave pay which your client, the Manila Chamber Orchestra Foundation, will give to the separated musicians of the dismantled Manila Chamber Orchestra, are exempt from income tax and consequently from the withholding tax. It is however, understood that the separated employees' 13th month pays are subject to income tax. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue