Taxability of the Separation Pay Benefits that Employee Will Receive as a Result of His Separation from the Company Due to Retrenchment

March 17, 1992 BIR RULING NO. 082-92 28 (b) (7) (B) 238-91 082-92 Joaquin Cunanan & Co. 8th Floor, BA-Lepanto Building 8747 Paseo de Roxas, Makati, Metro Manila Attention: Ms . Tomasa H . Lipana Gentlemen : This refers to your letter dated 24 February 1992 requesting in effect, a ruling on the taxability of the Separation Pay Benefits that the employees of your client, The East Asiatic Company Ltd., will receive as a result of their separation from the company due to retrenchment. It appears that your client is a general agent of shipping companies; that due to the reduced activities of its transport division arising from the break up of the Scandutch Consortium, it resulted to the termination of Nedlloyd agency as well as a reduction in the market coverage; that your client is now constrained to adopt a retrenchment program for its transport division employees in order to cut cost and to streamline the staff by reorganizing their functions otherwise, they will suffer heavy losses. In reply thereto, 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 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 or his heirs as a consequence of such separation. Since the separation of the employees of your client is due to retrenchment which 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. iatdc Based on the foregoing, any separation pay received by the employees of your client as a consequence of its retrenchment program is exempt from income tax, including the withholding tax related thereto. However, this tax exemption does not include the payment by your client to its employees of their salary and prorated thirteenth (13th) month pay for the year. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue