Exemption of the Separation Benefits and Incentives Received by Employees

May 3, 1989 BIR RULING NO. 094-89 28 (b) (7) (B) 523-88 094-89 Gentlemen : This refers to your letter dated April 12, 1989 requesting confirmation of your opinion to the effect that the separation benefits and incentives received by the employees of your client, Citibank, N.A. under its redundancy program are exempt from tax. cdtech It is represented that Citibank, N.A., a bank authorized to operate in the Philippines by the Central Bank is organized into three (3) major sectors, namely the Institutional, Investment and Individual Banks; that the Institutional Bank services the financial needs and worldwide banking relationships of local corporations, governments, non-profit organizations, and financial institutions; that due to changes in the last few years in the country, specially prior to 1988, certain companies closed shop and/or retrenched and business contracted; that because of these changes, the revenues of the Institutional Banking Group of Citibank had been on a downward trend since 1985; that the number of the Group's clients declined from 200 in 1985 to 47 in 1988; that in view of the Institutional Group's inability to complete with local commercial banks in local currency loans, the drop in interest income of foreign currency loan portfolio and the restricted number of high credit-worthy corporate customers, the Group expects this declining trend of its revenue to continue; that in order to arrest its declining revenue, the Group had to refocus its attention to deliver product to its customers at a more reasonable cost which resulted in a structural reorganization of the bank; and that as a result of the restructuring, the bank had to implement a redundancy program wherein its employees were forced to accept separation benefits in exchange for a quitclaim executed in favor of Citibank, N.A. and involuntary separation from Citibank, N.A. In reply thereto, I have the honor to inform you 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 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 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 the separation of the employees from the service of Citibank, N.A. 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 X, Title II of the Tax Code, as amended by Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82. It is, however, understood that the tax exemption does not include company's payment for salary and cash equivalent of accumulated vacation and sick leaves, if any. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner