Tax Exemption of the Separation Benefits to be Received by Dismissed Employees Due to Retrenchment

February 24, 1992 BIR RULING NO. 063-92 28 (b) (7) (B) 72 (a) 029-91 063-92 Atty. Ernesto P. Tabao 2188 San Jose St., Batanes Sampaloc, Manila S i r : This refers to your letter dated January 7, 1992 stating that your clients, seven (7) employees of the S.G. Printers and Silkscreen Specialist were illegally dismissed by the latter on October 4, 1991; that as a result, your clients filed an illegal dismissal case with the National Labor Relations Commission; that during the hearing of the case, the former employer claimed that the involved employees were not illegally dismissed but were retrenched since the company was on the verge of losing; that in line with the policy of the Department of Labor and Employment to encourage the amicable solution of labor cases, your clients and their former employer are presently exploring all avenues by which the controversy may be amicably settled; that the former employer offered to pay your clients' separation benefits as follows: 1) Fifteen days pay (unworked); 2) Termination pay computed at Fifteen (15) days per every year of service; 3) Pro-rated thirteenth (13th) month pay for the year; and 4) Thirty (30) days vacation and sick leave pay; and; that your clients having no other choice, accepted the offer but the employer wanted to withhold tax from the said separation benefits. In connection therewith, you posed the query on whether the separation benefits to be received by your clients are exempt from income tax and consequently from withholding tax and the priority of withholding the same in the event that it may be declared taxable. In reply thereto, I have the honor to inform you that under 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 employee 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 phrase "for any cause beyond the control of the said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. In other words, the separation must not be of his own making or choice. Since the separation is beyond the control of your clients, any and all amounts to be received by your clients from their employer as a result thereof, i.e., the settlement amount 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, every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with regulations to be prepared by the Secretary of Finance (Sec. 72. Income Tax collected at source. (a) Requirement of withholding). Finally, the tax exemption does not include the employer's payment of your client's salary and pro-rated thirteenth (13th) month pay for the year. This ruling is being issued based on the factual representation that there is involuntary separation. However, if upon subsequent verification it is found that involuntariness is wanting, this ruling shall be considered void ab initio . Very truly yours, JOSE U. ONG Commissioner of Internal Revenue