Benefits Received by Employees who were Separated for Causes Beyond Their Control are Exempt from All Taxes, Except for the Accumulated Vacation and Leave Credits

April 19, 1991 BIR RULING NO. 070-91 28 (b) (7) (B) 058-89 070-91 Gentlemen : This refers to your letter dated March 7, 1991 requesting for a ruling on behalf of your client, American Home Assurance Company (AHAC) to the effect that the benefits AHAC will pay its employees who are to be separated under an extension of its Special Early Retirement Program remain exempt from all taxes and consequently from the withholding tax. It is represented that in 1989, it was decided by AHAC, the Philippine American General Insurance Company and the Philippine Home Assurance Corporation that they would undertake corporate reorganization in connection with which the operations of the three entities would be consolidated into AHAC; that the corporate reorganization naturally resulted in the redundancy of common job items which required a staff reduction of approximately 33%-38% of the workforce (from 645 to approximately 400-430) to prevent further incurrence of unnecessary overhead expenses; that the three entities undertook a staff reduction program that affected the employees who consented to their being separated, after being informed of the companies decision to reduce their staffs; that in BIR Ruling No. 28 (b) (7) (B) -035-89-058-89 dated April 5, 1989 this Office ruled that the separation of the employees of American Home Assurance Company, the Philippine American General Insurance Company and Philippine Home Assurance Corporation under their Staff Reduction Program is beyond their control, hence 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; that a recent review by AHAC of its present organizational structure has disclosed that due primarily to the consolidation effected in 1989, at least 50 more employees remain redundant and need to be terminated; and that AHAC has decided to reduce its present staff by at least 50 employees more, by extending the effectivity of; and using the very same Special Early Retirement Program implemented in 1989. cdtech 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 of 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 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 50 employees from the service of your client is beyond their control, 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 or sick leaves, if any. cdti Very truly yours, (SGD.) JOSE U. ONG Commissioner