Exemption from Tax of Amounts Received by Employees Separated from Service Due to Retrenchment Program

June 18, 1991 BIR RULING NO. 113-91 28 (b) (7) (B) 193-90 113-91 Gentlemen : This refers to your letter dated February 14, 1991, requesting a ruling on the taxability of the separation pay benefits to be paid under your retirement program pursuant to Section 28 (b) (7) (B) of the Tax Code, as amended. It is represented that due to the harsh economic conditions, the Company has to reduce its manpower; that Mindanao Steel Corporation (Minsteel) has adopted a retrenchment program; that it is offering separation pay equivalent to two (2) months salary for every year of service to employees who desire to retire early. 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 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 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; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of your employees affected by your Retrenchment Program, 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. Finally, the tax exemption does not include company's payment for salary, prorated 13th month pay and cash equivalent of accumulated vacation or sick leaves, if any. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner