Taxability of the Separation Pay Benefits That Employee Will Receive as a Result of His Separation from the Company

March 17, 1992 BIR RULING NO. 081-92 28 (b) (7) (B) 238-91 081-92 Pelaez, Adriano and Gregorio Attorney's and Counsellors-at-Law Padilla Bldg., Emerald Avenue, Ortigas Center, Metro Manila Attention: Atty . Cesar G . Otero Gentlemen : This refers to your letter dated 14 January 1992 requesting a ruling on the taxability of the Separation Pay Benefits that the employee of your client, Mindanao Fruit Company, will receive as a result of his separation, from the company. It is represented that Mr. Naido Duldulao, one of the employees of your client, tendered his resignation on 22 June 1991 and executed a Deed of Release, Waiver and Quitclaims on 24 July 1991 marked as Annexes "A" and "B" in your letter; that on the basis of said Letter of Resignation and Deed of Release, Waiver and Quitclaims, your client withheld the total amount of P241,941.32 as income tax due from its money payments to Mr. Duldulao consisting of gross salary pay of P243,304.20 for January-June 21, 1991 and 13th month pay of P20,275.35 including a gratuity (separation) pay of P765,442.00 or the total amount of P1,029,021.55, marked as Annex "C" also on said letter. However, before your client was able to remit the said amount withheld from Mr. Duldulao's separation pay, the Regional Trial Court, Branch 17 of Davao City issued a restraining Order on the basis of the opinion rendered by the Regional Director, Revenue Region No. II-B, Davao City exempting the separation pay of Mr. Naido Duldulao from withholding income tax pursuant to Section 29(b)(7)(B) of the Tax Code, considering that the separation was due to a cause beyond the control of said employee, also marked as Annexes "D" and "D-1" on your letter; that despite the opposition of your client, the said Court issued a preliminary injunction to enjoin your client from effecting withholding tax on Mr. Duldulao's separation pay and likewise prohibiting remittance of said amount to the Bureau of Internal Revenue. 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 his heirs from his 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 said official or employee is exempt from taxes regardless of age or length of service. The above-mentioned 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 the benefits to the official or employee or his heirs as a consequence of such separation. As per Court's finding in Civil Case No. 20,865-91 entitled "Naido Duldulao vs. Mindanao Fruits Company, et al.", the resignation of the employee of your client was involuntary giving him no choice but to agree to the unreasonable demands of your client for him to resign otherwise, he will suffer irreparable loss and injury, not only for him and his family but a higher damage of his reputation for his future employment. Since the separation of Mr. Duldulao is beyond his control, any and all amounts received by him 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. It is, however, understood that this exemption does not include your client's payments of salary and 13th month pay to Mr. Naido Duldulao. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue