Exemption of Employee Separation Program from tax

March 2, 1988 BIR RULING NO. 065-88 28 (b) (7) (B) 042-88 065-88 Gentlemen : This refers to your letter dated February 10, 1988 requesting a ruling as to whether the separation benefits and incentives to be received by the employees of the Philippine Airlines (PAL) under its Employee Separation Program is exempt from tax. It is represented that in order to recover from its huge financial losses incurred over the last five years, PAL has embarked on a reorganization program to improve productivity and to maintain the efficient delivery of air transport services to the public; that in implementing the program, PAL finds an urgent need to reduce its workforce by at least 20% due to overstaffing and redundancy as well as to reduce payroll costs, and that in order to do so, it has launched a separation program for employees who express their willingness to be separated from the company. 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 PAL is beyond their control, any and all amounts to be received by them as a result thereof, consisting of the separation benefits and incentives, 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