Exemption of the Separation Benefits Received upon Retirement from Private Sector

March 4, 1988 BIR RULING NO. 076-88 28 (b) (7) (B) 042-88 076-88 S i r : This refers to your letter dated March 1, 1988 requesting opinion as to whether the separation benefits which you received when you retired from the private sector to join the government service is exempt from tax. It is represented that you were invited to serve in the government right after the 1986 February revolution; that it was not exactly easy to refuse to serve the new government, considering that it needed all the help it could get to restore democracy and preserve our new-found freedom; and that the financial sacrifice resulting from the reduced income upon joining the government and giving up a more profitable private practice are hardly made up for by separation benefits. 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 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 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 you cannot refuse the invitation to serve the new government, your leaving the private sector to join the government service is beyond your control. Accordingly, any and all amounts received by you as a result thereof, 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. aisadc Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner