Separation Pay of Employees who were Separated for Causes Beyond Their Control are Exempt from Income and Withholding Taxes

April 19, 1991 BIR RULING NO. 071-91 28 (b) (B) 058-89 071-91 Gentlemen : This refers to your letter dated March 15, 1991 requesting a ruling as to whether the separation pay which the employees of your client, Ciba-Geigy Philippines, Inc. (company) will receive under its Special Separation Program is exempt from income tax and consequently from the withholding tax. It is represented that it was recently established by the company that many positions are occupied by incumbents who, because of their long association with the company are receiving salaries clearly out of proportion to the services that they render; that in addition to the foregoing; the company also suffered substantial losses because of recent negative economic developments; that the company has determined that the functions inherent in several job positions in the company can either be dispensed with or performed by employees occupying other positions resulting in redundancy; that these findings and development will naturally require the rationalization or elimination of 30 to 50 economically unviable or redundant positions (rank and file, supervisory and managerial) to prevent further incurrence of unnecessary and excessive overhead expenses; and that the Special Separation Program of your client would initially cover employees who after being informed by your client of its decision to eliminate redundant or economically unviable positions, consent to be separated from employment. 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 the 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 the said official or employee is exempt from taxes regardless of age or length of service. The above mention 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 employee 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 and cash equivalent of accumulated vacation or sick leaves, if any. Very truly yours, (SGD.) JOSE U. ONG Commissioner