Whether Separation Pay is Subject to Withholding Tax

April 11, 1995 BIR RULING NO. 071-95 28 (B) (7) (B) 000-00 071-95 General Offset Press, Inc. 10 Calle Obrero St. Bagumbayan, Libis Quezon City Attention: Mr . Miguel A . Cardino, Jr . Gentlemen : This refers to your letter dated November 12, 1994 requesting for a ruling as to whether or not the separation pay received by Ms. ADELIZA OLA is subject to withholding tax. LexLib Documents submitted showed that the said Ms. Ola was employed by General Offset Press, Inc. (GOPI) on September 16, 1974 as an Inspector in the Quality Control Section of the firm; that last August 23, 1993, the company, through its Manager, Mr. Mike Cardino, Jr., issued to her a memorandum with notice of her retirement effective August 23, 1993 despite Ms. Ola's objections; that due to this, labor case entitled "Samahang Manggagawa as General Offset Press, Inc. (SMGOPI-ANGLO) vs. General Offset Press, Inc. (NLRC-NCR-00-07844-930 ensued, the decision therein was handed down by Mr. Manuel P. Asuncion, Labor Arbiter, on June 16, 1994, the dispositive portion of which is partially quoted hereinbelow, viz: "The General Offset Press, Inc. justified its action against the complainant. There is an existing collective bargaining agreement in the company and a provision of the same, particularly Section 4-a of Article XVI was invoked by the company on the retirement of Adeliza Ola. The provision is hereunder: " At the option of the Company . At the option of the Company, an eligible employee may be retired upon having rendered eighteen (18) years of credited service to the company. The eligible employee shall be entitled to sixteen (16) days for every years of service based on the latest salary rate." ". . . The retirement of Adeliza Ola last August 28, 1993 was validly undertaken. It was in consonance with the provision of the CBA particularly Section 4-a which gives (the) management of General Offset Press, Inc. the option to retire its employees who have rendered 18 years of service. Ola has worked fort the COMPANY for 19 years and the LATTER DECIDED TO EXERCISE THE OPTION. . . . "xxx xxx xxx "WHEREFORE, the validity of the retirement of Adeliza Ola on August 23, 1993 is hereby upheld. Pursuant to Article XVI Section 4-a of the CBA, Ola is entitled to separation pay in the monetary equivalent of sixteen (16) days for every year of service she has rendered." Based on the foregoing decision of the National Labor Relations Commission (NLRC), it is very clear that this is a case of retirement in accordance with the provisions of a Collective Bargaining Agreement (CBA), hence, not involuntary. When an employee enters into a CBA, it only means that he/she has entered into a valid contract and that he/she totally agrees with the terms and conditions set forth in the said agreement. Therefore, if later on, she will be forced to retire by virtue of a provision in the said CBA (even though against her will), that retirement cannot be considered as involuntary. Section 28(b) (7) (B) of the Tax Code, as amended, provides that "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" shall be exempt from taxation. This instant case, however, does not fall with the purview of the aforesaid provision. Moreover, the facts of the case ad represented has no mention whatsoever that the subject company has an approved retirement plan for the employees where the said Ms. Ola can ride on for the said tax exemption. In view thereof, it is the opinion of this Office, as it hereby holds that the retirement/separation pay that the said Ms. Adeliza Ola received from your company is subject to income tax and consequently from withholding tax. Hence, your act of withholding the proper taxes from her said retirement/separation pay is correct and should be maintained. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue